Having $1 million might seem like a lot of money, but if you have saved and invested over the years, you may eventually have a million dollars. In fact, according to Credit Suisse, there were 18.6 million millionaires in the United States in 2019. Finding out how to invest 1 million dollars is a relevant question for literally millions of people.
Do you know what you would do with a million dollars? Though the specific strategies will be different for everyone, there are many possibilities for investing $1 million.
What to Do Before You Begin Investing
- Understand Your Financial Goals: If you’ve already crossed the $1 million mark, you’ll need to consider what your future financial goals are seriously. Do you want to grow your fortune to $2 million or even $10 million? Or do you want to kick back and enjoy the good life? This helps determine how you’ll manage your fortune.
- Pay Off Debt: The best return on your money comes from paying off debt. If you have high-interest loans like credit cards, pay those off first. And if you’re worth at least $1 million, neither a car loan nor student loan debt makes any sense.
- Build a Fully-funded Emergency Fund: It may seem ridiculous to talk about an emergency fund if you have a million dollars, but all emergency funds are relative. And you’ll need one regardless of your wealth level. You should have between three and six month’s living expenses in your emergency fund, which will help protect you from unexpected emergency expenses and short-term income disruptions. An emergency fund acts as an insulator between you and your investments. It’s recommended to keep a large portion of your emergency funds in a high-yield savings account, like the one’s offered by Betterment Cash Reserve.
- Max Out Your Retirement Plan: Without even getting into how you’ll invest the money, you should certainly max out any retirement plans you participate in. If that’s a 401(k) plan, contribute the maximum $19,500 (or $26,000 if you’re at least 50 years old). If it’s an IRA, contribute the maximum $6,000 per year (or $7,000 if you’re age 50 or older).
Consider Working With a Professional
Many investment advisors work with high-net-worth clients on a one-on-one basis. They’ll not only manage your investments for you but can often provide advice on overall financial management, such as estate planning. One such firm is Facet Wealth, which assigns you with a CFP® professional to create and manage a dynamic financial plan.
Investment advisers are commonly associated with large brokerage firms and generally, charge annual fees totaling between 1% and 2% of the assets under management. That can be a lot if you have $1 million.
An alternative is to work with Personal Capital. They’re a hybrid between a robo advisor and a full-service personal investment manager. You’ll get one-on-one advisory services but at a much lower fee than you’ll pay to a traditional investment manager.
Determine Your Investor Profile
- Your Investment Goals — Answer the question, “Where do I want to be in X years?” You can have multiple goals. For example, you may want to own a bigger home, live in a different location (or country), or even be fully retired well before the age of 65. Defining those goals will help you create a comprehensive investment strategy.
- Your Investment Timeline — How long do you need to reach your goals? If you have a longer time horizon, like 20 or 30 years, you’ll be able to take more risks with your investments. That’s because you’ll have more time to make up for any losses accrued in the short term.
But if your investment timeline is shorter, like five or ten years, you’ll want to be more conservative. You may want a certain amount of growth in your investments. But capital preservation may be your main objective.
- Your Risk Tolerance — Risk tolerance is about your ability to accept losses from your investment activities. This tolerance level is different for each investor. One investor might be comfortable losing 25% in the pursuit of a 50% gain in five years. Another may consider a 5% loss to be a traumatizing event.
To invest effectively, you’ll need to know where you fit on the risk tolerance spectrum. An excellent way to make that determination is to use the Vanguard Investor Questionnaire. It will help you determine your risk tolerance. And this will help you build a portfolio that works for you on an emotional level.
Where to Invest a Million Dollars
Having $1 million gives you plenty of investment options. Below are some ideas.
1. Invest in the Stock Market
For most people, stocks occupy the largest part of their portfolio since they provide growth. Investing in Stocks can also help hedge against inflation. The roughly 10% average annual return stocks provide over the very long term will help you cover not only inflation but also grow your portfolio. (Including inflation, this 10% works out to 7%.)
You can invest in stocks through exchange-traded funds (ETFs) — which we’ll cover in a moment — or by building your own portfolio of individual stocks. If you go the individual route, often referred to as self-directed investing, you’ll need to open a brokerage account where you can trade stocks. You can choose from one of the many excellent online brokerage firms available. Most will allow you to trade free, such as Ally Invest and E*TRADE.
However, keep in mind that stocks can fluctuate in value. In one year, you may feel the exhilaration of a 25% gain, only to get clobbered with a 20% loss the following year. You’ll need to maintain your composure through the ups and downs, knowing that the long term can work in your favor if you have a diversified portfolio.
2. Invest in Bonds
If investing in stocks is about providing growth in your portfolio, bonds are mostly about capital preservation. Since they pay the full face value at maturity, you’ll at least get back your original investment if you hold until the bond matures. In the meantime, you earn interest income.
Bonds work to counterbalance the risk involved in stocks. Because they’re interest-bearing and guarantee payment of principal, their values tend to fluctuate much less than stocks. In fact, shorter-term interest-bearing securities (typically those with maturities of five years or less) hardly fluctuate all. Longer-term bonds (such as those with terms of 20 years or more) can rise and fall in value based on changes in interest rates.
Bonds are available in different types. For example, you can invest in corporate bonds, U.S. government bonds, municipal bonds, and even international bonds. You can buy bonds either directly from the government or through a brokerage account.
3. Invest in ETFs
If you’re not comfortable choosing individual stocks and bonds, you can invest in exchange-traded funds (ETFs). These are low-cost funds that invest in either stocks or bonds and are often based on popular indexes. For example, if you want to invest in large-company stocks, you can invest in an ETF that’s based on the S&P 500 index. The composition of the fund will match that of the S&P 500.
ETFs are designed to match the market, not outperform it. But that has a big advantage in that it won’t underperform either. It’s the best way to invest in the general market without taking on the risk that comes with individual stocks or bonds. ETFs are especially important with bonds because they allow you to invest in a portfolio of many bonds, rather than choosing just a few.
ETFs, unlike mutual funds, don’t charge load fees. They also have very low expense ratios. This means you’ll get to keep more of the investment return they provide. You can use brokers such as Public.com to invest in specific sectors, such as international stocks, financial companies, energy, precious metals, health care, or technology, among many others.
4. Invest With a Robo Advisor
If you like the idea of investing in ETFs but don’t want to choose and manage the funds in your portfolio, you can sign up with a Robo advisor. These are online, automated investment platforms that create and manage your portfolio for you. All you need to do is fund your account, tell the platform your risk tolerance and goals, and then go about your life.
Robo advisors build a balanced portfolio of stocks and bonds, though some will also add natural resources and other sectors. And since they invest in ETFs, your money is spread across thousands of different securities, including those on international markets. Best of all, they charge very low fees for the service: typically no more than 0.25% of your portfolio value. A $1 million portfolio can be fully managed for just $2,500 per year.
You can choose from one of many outstanding robo advisors. Our personal favorite for beginning investors is Betterment, as it comes with no minimum deposit and has low fees.
5. Private Lending or P2P Lending
Interest rates on traditional investments — savings accounts, certificates of deposit (CDs), and even U.S. Treasury securities — are admittedly very low these days. If you want to increase the income level on the fixed-income portion of your portfolio, you can add some private lending to the mix to improve the overall yield of your portfolio.
An easy way to do this is through peer-to-peer (P2P) lending. These are online platforms where borrowers come to take loans that are funded by participating investors. Some P2P investors earn double-digit returns on their investments. Two of the biggest P2P lending platforms are Lending Club and Prosper.
You won’t want to invest a large percentage of your portfolio in this type of lending. The loans you’ll invest in do carry the risk of default. But a small position can really improve your fixed-income returns.
6. Invest in a Business
This can be one of the most lucrative ways to invest your money. It can be done in one of two ways. Either you invest in a business that you will operate, or you act as a silent partner for an existing business.
If you’re going to invest in your own business, you can either start a business from the ground up or buy an existing business. Buying an existing business will typically require more capital, but it will be a lower risk than a startup since it’s already established. Either way, make sure you’re familiar with the business and feel confident you can make it a success. The failure rate of new businesses is uncomfortably high.
If the idea of starting your own business doesn’t interest you, you can go the silent partner route. This is when you invest money in a successful, established business that’s in need of capital for growth. In exchange for your investment, you’ll get a share of ownership of the business. This will also entitle you to a percentage of future income.
It’s less risky than starting your own business because you’re investing in an established company. But it’s also a passive way to earn money on your investment since you’ll act as an investor while the original business owner operates the business.
7. Invest in Rental Properties
Another way to invest $1 million is through renting individual properties, including single-family homes, multi-family homes, small commercial properties, or even specialized projects like fix-and-flip projects.
Historically, real estate has been one of the very best long-term investments. However, it has the disadvantage that it is a very hands-on venture. In fact, it’s really a hybrid between investing — because of the capital you’ll need to put into each transaction — and business because of the direct involvement you’ll have in the purchase, management, and sale of the property.
On a long-term basis, real estate can be very profitable. For example, if you make a 20% down payment ($60,000) on a $300,000 small duplex and rent it out for a combined $2,500 per month, you’ll make a monthly profit while also paying the mortgage. After 30 years, the combination of property appreciation and paying off your mortgage will give you a mortgage-free property. You then have the option to either sell the property at a huge gain or continue renting it and reaping an even larger net cash flow.
8. Invest in Real Estate Investment Trusts (REITs)
Perhaps the easiest way to invest in real estate, particularly commercial real estate, is through a real estate investment trust (REIT). These are essentially mutual funds that own and manage commercial real estate. That can include office buildings, retail space, large apartment complexes, warehouses, industrial space, and other types of property.
Each trust holds multiple properties. This gives you greater diversification with a small amount of money. They’re often spread across different geographic markets, which avoids having your entire real estate investment concentrated in a single local market area.
One of the big advantages of REITs is that they’re legally required to disperse at least 90% of their net income as distributions to shareholders. That means they’re an excellent source of annual revenue and can also provide capital appreciation upon the sale of properties held in the trust. If you’re an accredited investor with at least $100,000 to invest, the private equity firm Origin Investments might be for you, as it offers investments in diversified and carefully-vetted real estate funds.
9. Invest Through Real Estate Crowdfunding
If you like the idea of being more directly involved in specific real estate deals but don’t want to get involved in the day-to-day details of the process, you can consider investing through real estate crowdfunding.
There are many different real estate crowdfunding platforms to choose from, and each has its own specialization. For example, you can choose a platform that invests in individual commercial buildings. Or you can choose individual residential properties or even fix-and-flip opportunities. Our recommended service is Crowdstreet, as it offers only commercial real estate and charges no fees.
Real estate crowdfunding offers you an opportunity to invest in either an equity position or debt to finance real estate projects. It’s a classic high reward/high-risk venture, with the potential for loss. For that reason, many real estate crowdfunding platforms require you to be an accredited investor. But if you have $1 million, you’ll automatically qualify.
There Are Many Ways to Invest $1 million
The good thing about reaching the $1 million mark is that it gives you plenty of investment options. But the basic investment objectives are the same as if you had a much smaller amount of money. You’ll still want to come up with the best combination of growth, income, and capital preservation. It’s possible to do, but it requires diversifying your funds. You’ll need to decide the best investments and best accounts for you.