Having $500,000 to your name is a huge advantage, as there are so many investing opportunities available to you. However, the principles of building a strong portfolio remain the same for all investors, regardless of their investable assets. You should still have a specific asset allocation with investments diversified across the market. But with that level of assets, you’ll have the ability to invest in unique things, like hedge funds, real estate and more. Of course, with great assets comes great responsibility, making the input of a financial advisor even more valuable.
The Basics of Investing $500,000
Whether you have the money right now or are just planning for the future, it never hurts to think about how you’ll manage your growing wealth. Luckily, there are a few options that a six-figure investment portfolio can open up for you. Just make sure that you still follow smart investing principles, though.
Unless you’re looking for radical and risky growth, it’s usually a good idea to have a portfolio that’s balanced to your risk level. For example, if you’re decades away from retirement, you can afford to invest riskier with an eye towards higher gains. On the other hand, if you’re just a few years from retiring, you may want to scale down your risky investments and focus on safer things.
Aside from your risk tolerance, you should also make sure to diversify your assets through the market. This means not only spreading your assets across multiple investment types, but also different market sectors. For example, just because your believe the healthcare industry is on the rise doesn’t mean you should put all your money there. By avoiding this, you can protect yourself from large market fluctuations.
Investing in the Stock Market
One of the first things most people will think of when they have a large pool of cash is to invest it in some of the trendiest companies. For instance, you may be interested in investing in Tesla, Microsoft, Apple, Google and other major companies. On the flip side, you might have some of your own thoughts on smaller companies that are primed for large gains in the future.
Regardless of which pool you fall into, the stock market is both rewarding and dangerous. If you can pick the right companies to grow over time, your returns will be quite impressive. But as you might imagine, it’s not always that easy. So if you pick wrong, you might on the hook for some major losses.
As we state above, nothing is more important than diversification when investing in stocks. Pick your stock’s very carefully, and avoid putting too much of your money in one place. Similarly, avoid putting too much money in a specific area of the market.
Investing in ETFs and Mutual Funds
Index funds are boring, predictable and safe, which are all excellent words when associated with your money. Even though $500,000 is a lot of capital, the volatility of the stock market might feel a bit too scary for you. In fact, the opportunities for a significant return created by having a lot of cash on hand make riskier investments potentially unnecessary.
Instead, one option when investing a half million dollars is to play it cool and sink that money into mutual funds or exchange-traded funds (ETFs). While the safety of these asset classes generally come at the cost of lower returns, having a significant initial investment offsets that to a significant degree. Your money won’t grow as fast here as it might elsewhere, but it will still see meaningful gains, especially when accounting for compound interest.
ETFs are some of the safest stock-based investments you can make, as they track entire markets rather than focusing on one or a small group of companies. For example, ETFs can include the stocks of companies in the commodity, technology, healthcare and other industries. Mutual funds work similarly in that they are pools of investments. However, professionals are behind mutual funds, which means they’re looking to maximize returns. This makes mutual funds pricier, but more hands-on.
Investment funds are a particularly wise move for retirement savings. In fact, for an investor in their 20’s or 30’s, this investment can set you up for a generous retirement all by itself. Given the S&P 500’s average 10% annual return, an up-front investment of $500,000 can turn into more than $8.7 million by the time you’re ready to retire. That’s even if you never put another penny into the account.
Investing in Hedge Funds
You’ve probably heard of hedge funds before, but if you’re like the average investor you may not necessarily know what this product actually is.
Hedge funds, like all fund-based assets, are what’s known as pooled investments. This means that the fund uses the combined money of all its investors to buy the assets in its portfolio, then distributes the proceeds from those investments on a pro-rata (typically per-share) basis.
Hedge funds generally take higher-risk positions than these otherwise comparable products and seek higher rates of return. They do so by taking more aggressive positions. Hedge funds will tend to invest in more exotic and risky assets than a mutual fund might, such as commodities, derivatives or (in the modern era) cryptocurrencies, or will take higher risk positions such as short sales.
While this can make hedge funds considerably more profitable than a mutual fund, they also come with greater risks. As a result they are under much different regulation. These are private assets not available to the general public. The general public can’t buy into hedge funds. Only what’s known as an accredited investor can buy into a hedge fund. Accredited investors are sophisticated individuals or institutions, with knowledge of the market and a high net worth. This creates a high barrier to entry. In addition to this requirement hedge funds generally require a six-figure minimum buy-in, with many costing at least $500,000. In exchange they hold out the prospect of big returns.
Whether hedge funds actually provide returns to justify their big fees is another question. Many don’t, so research carefully before sinking your money into an expensive product that promises to beat the market.
Investing in Real Estate
In many markets, real estate has provided investors with big capital appreciation. Farm land, for example, can grow in value significantly. Urban real estate is also a strong option. In Boston, real property values have doubled over a period of five years. In New York City, median sale prices have increased by $100,000. Even in Detroit, commercial property values grew by more than a third in one year alone. Does this mean that real estate is always a good idea? Not even remotely. But it does mean that in the right markets, real estate can provide some of the highest returns of any asset.
More than just about any other asset class, buying into real estate takes money. Paying for property with debt still has high up-front costs, and interest rates will eat away at any profit you make. Paying with cash means having the money on hand to buy into one of the most expensive asset classes on the market. A $500,000 nest egg gives you the chance to buy into this market, whether in the form of a farm or ranch, a residence or even a storefront.
Of course real estate isn’t without its downsides. This is arguably the most illiquid asset you can purchase. That’s because even if you can sell the property easily, it sometimes takes years for real estate to appreciate in value. What’s more, this is a highly speculative asset class. While a very strong investment category overall, there is a very real element of risk here. Buy into the wrong market or at the wrong time and you can lose a lot of money.
But money unlocks opportunities, and if you buy into the right market at the right time … well that’s a very different story.
The choices of what to do with $500,000 are legion. Among them are hedge funds, real estate and index funds. While people with a lower net worth often buy index funds, they can also be attractive to the wealthy. That’s because some index funds track highly speculative indices that hold the potential for outsized gains. They can also be attractive to the wealthy by serving as the proverbial anchor to windward for a six-figure portfolio.
Tips for Investing
- Whether you’re looking to invest $500,000 or $500, SmartAsset’s free matching tool can help you find a financial advisor in your area in minutes. Get started now.
- Never put all your financial eggs in one basket. Be sure to prudently allocate your assets across various areas of the market. An asset allocation calculator can be a useful guide for this.
Photo credit: ©iStock.com/Farknot_Architect, ©iStock.com/Juanmonino, ©iStock.com/Nikada