How to invest $100k: A complete guide

Do you have $100,000 ready to invest? Great. This article will show you how to invest $100k in a few different ways while considering both the risk and the reward sides of the equation.

It’s common for individuals to research how to invest $100k in an attempt to turn that into a much larger sum, something such as $500k. But simply asking the question of how to invest $100k in order to turn it into $500k is a faulty approach. That question ignores the risk side of the equation. Let’s use an obvious example to illustrate.

You could put $100k on a single spin of the wheel of roulette in a casino in an attempt to double your money. Do that a couple times and you could easily end up with over $500k. But you could just as easily end up losing the entire sum of money. While the reward is high, the risk is also extraordinarily high.

So, we want to consider how to invest $100k thoughtfully while considering risk and while keeping the larger financial picture in mind. As we consider this topic, we’ll want to address the following:

• How your age might dictate how you invest $100k
• The whole financial picture
• Why a $100k chunk can be so impactful
• Target allocations for $100k & more
• The three-fund portfolio
• Should you pick stocks?
• What types of investment accounts should you be using?

How to invest $100k by age

In financial planning, the common advice is that if you’re young with many decades to go before you need your money, you should be positioned very aggressively. You should be heavily tilted, or even 100% weighted, towards equities. This refers to the common stocks & bonds split that is a foundational principle in investing and financial planning.

This concept is easily demonstrated by the widely accepted bonds formulas you’ll often see cited in financial articles. One of the more simple formulas is “The Rule of 100.” This rule says you basically subtract your age from 100 and the result is how much of your allocation should be invested in bonds. From Smart Asset:

One common asset allocation rule of thumb has been dubbed The 100 Rule. It simply states that you should take the number 100 and subtract your age. The result should be the percentage of your portfolio that you devote to equities like stocks.

If you’re 25, this rule suggests you should invest 75% of your money in stocks. And if you’re 75, you should invest 25% in stocks. The rationale behind this method is that young folks have longer time horizons to weather storms in the stock market. In theory, they would be safe to invest heavily in growth-oriented securities like stocks. Historically, equities have outperformed other types of assets in the long run.

But if you’re nearing or in retirement, you’d need your money sooner. So, it may make more sense to invest more heavily in securities such as fixed-income investments that are generally considered “safe.”

If you go with this simplified approach, it’s pretty easy to decide how to invest $100k simply based on your age. Here is a simple list to demonstrate how to invest $100k by age:

• Age 20: $80k in stocks / $20k in bonds
• Age 25: $75k in stocks / $25k in bonds
• Age 30: $70k in stocks / $30k in bonds
• Age 35: $65k in stocks / $35k in bonds
• Age 40: $60k in stocks / $40k in bonds
• Age 45: $55k in stocks / $45k in bonds
• Age 50: $50k in stocks / $50k in bonds
• Age 55: $45k in stocks / $55k in bonds
• Age 60: $40k in stocks / $60k in bonds
• Age 65: $35k in stocks / $65k in bonds
• Age 70: $30k in stocks / $70k in bonds
• Age 75: $25k in stocks / $75k in bonds

Pretty simple, huh?

This simple concept has also launched a new suite of products from investment firms called target date funds. Target date funds essentially shift your allocation over time based on your age for you. If you’re 30 years old, and you assume you’re going to retire in 2055, then you can essentially invest in a 2055 Target Date Fund which will have its internal holdings shift from a heavy equity weighted approach towards a more conservative, heavier bond allocation as the years approach the target year of 2055.

These funds have become popular in recent years as the passive index investing boom as increased and as investors increasingly want “hands-off” approaches to retirement planning. It doesn’t get more hands-off than throwing your cash into a target date fund which handles rebalancing and the shifting of target allocation as you approach your retirement years. So, if you wish to invest your $100k as simply as possible, consider just throwing it in the target date fund that applies to your target retirement year. But if you’re like me and are looking for a bit more sophistication or just like learning a bit more about investing, then keep reading. There’s much more still to discuss.

The whole financial picture

Simply talking about how to invest $100k without considering the total financial picture is kind of silly. We’ve addressed age, but there are many other variables. For instance, are you working or retired? What’s your income? Do you have other financial goals such as saving for a house or saving for your kids’ college expenses? These are all important elements to consider as we consider allocating this hypothetical $100,000 sum.

An emergency fund

Do you have a worthwhile emergency fund? Can you manage job and income loss for up to six months without having to liquidate investments? If not, you might consider allocating a portion of your $100k into your emergency fund. Utilize some simple savings accounts and/or CDs to stash this money away. This money is not allocating for any sort of return. It’s there for emergencies. It’s there so that you don’t have to sell actual investments when a hardship occurs. If you generate a couple percentage points of return on this money, then that’s great, but that’s not the priority.

Debt

Do you have any consumer debt? It’s pretty common even for successful individuals to owe money on an automobile. It might be worth using part of the $100k to pay off the auto loans.

By and large, most financial planners will agree that mortgage debt on a primary residence is acceptable debt and might not warrant using this $100k in extra cash to pay down. However, there are some exceptions worth noting. The main one is if you’re in a mortgage that is especially expensive or requires mortgage insurance. If you can use part of your $100k to refinance your mortgage, get the loan-to-value down, it can result in savings of several hundred dollars a month if it eliminates a mortgage insurance requirement. This is indeed a worthy use of money. Moreover, if you have a drastically higher interest rate on your mortgage compared to what’s available today, it might be worth refinancing. If you need some of the $100k to make this happen, it can also be worth consideration. Essentially, in both of these scenarios, we’re only applying some of the $100k towards our primary residence mortgage in the event that it leads to significant savings on a regular basis moving forward. This type of savings can lead to enhanced wealth building over time, or a worthwhile return on the portion of the $100k used.

Considering income & savings rate

How much money you’re earning is important because it directly leads to how much money you might be saving and investing on a regular basis. How much money you’re contributing to investments on an ongoing basis is an important consideration when determining how to allocate $100k.

If you’re making enough money to support your lifestyle and already have a quality savings and investing process in place, then investing the $100k is probably a pretty straight forward process. In this case, you might just allocate the $100k toward the investment structure and allocation already in place.

What does a quality savings and investing process in place look like? At a minimum, it should be where you’re saving 15% of your income towards retirement as well as perhaps saving a bit more of your income towards other investments. It also assumes a fully funded emergency fund and a cost of living that is in check with your income (your mortgage is manageable, your regular expenses are manageable). Individuals with much of this automated tend to do better than those without an automated approach. The most common automated investing approach is a 401(k) plan where the money is automatically taken out of your paycheck and invested for you. It’s always amazing to hear from individuals who amass large sums of money almost without even knowing it simply through vehicles such as a 401(k) plan. Take advantage of them!

Other financial goals

Retirement isn’t the only financial goal out there. While it tends to be the focus for individuals that are further along in life, younger folks have many financial goals while attempting to jumpstart retirement savings. These tend to be saving for a house and saving for kids’ education. Getting a one-time sum of $100k can make saving for a home a very simple process. If you have yet to buy a home and have much of your financial house in order, using some or all of the $100k on a down payment for a responsibly purchased home can definitely make sense.

Moreover, if you want to jumpstart some 529 accounts for your kids’ future college expenses, consider maybe taking $10k for each kid out of the $100k and allocate those sums into the 529 accounts, then throw the rest into your long-term investments.

Why $100k can be so impactful

Let’s shift gears here a bit and look at investing from a broader perspective. The reality is that for most people, a $100,000 sum of money that jumpstarts investments is incredibly impactful.

Oh, getting $100k is impactful? Duh!

I know. Everyone knows that getting $100k is great, so what am I talking about?! Well, let’s dig deeper a bit and try to actually quantify the impact.

In other articles, I’ve talked about the phases of accumulation investing. In a recent article about asset allocations for young investors, we explore the idea of going conservative in a target allocation while in the phase 1 of accumulation investing – the phase where an investor is amassing his or her first chunk of money. In this article, we make the case that asset allocation for the first chunk of money – whether it be $50k or $100k – really doesn’t move the needle much in terms of return, so it can make sense to go with a conservative approach and simply avoid extreme volatility. By avoiding volatility, we can ensure the investor doesn’t get rattled and stays on the path toward long-term financial goals.

Take a look at this chart which shows a variety of asset allocations as an investor saves from zero to $100,000.

As you can see, the lines are very close together. The difference is marginal at best. How marginal? Well, if you go with 100% stocks and 0% bonds while investing $1500 per month, you reach the $100,000 target two months earlier than if you were to go with a super conservative 50% stocks / 50% bonds split. Why is that?

The reality is that almost all of the gains while accumulating your first $100k come from your savings rate, not your rate of return. Phase 1 of accumulation investing is simply all about saving money. Saving money so that you can get through phase 1 and into phase 2 where you can actually begin generating some decent returns.

The beauty of getting an initial $100k is that you’re essentially skipping phase 1 of accumulation mode investing. You’re jumping right into phase 2 depending, of course, where you define that line between phase 1 and phase 2. Interestingly, I tend to define that line as right around $100,000.

Phase 2 of accumulation investing

We showed above that the differences in reaching the $100k target for a phase 1 investor is two months when comparing the 100/0 and 50/50 allocations. What about if we were to go from $100k to $500k? We’ll keep the same assumption of investing $1500 a month, but this time we’re starting with $100k instead of with zero.

As you can see, as you approach the right-hand side of the chart, the variation in the lines starts to widen. As the assets build, the rate of return differences start to have more and more of an impact.

But back to our original question, how long does it take to get from $100k to $500k if you’re saving/investing $1500 each month? And, secondly, how much does the different allocations move the needle and speed up or slow down the approach to $500k?

Using the most aggressive allocation, the investor goes from $100k to $500k under this scenario in 110 months (9.16 years). The conservative model of 50 / 50 stocks and bonds takes 12 months longer, or 122 months (10.16 years). So, by going more aggressive, you can cut a year off from the length of time required compared to the 50 / 50 conservative allocation. While maybe not a huge difference, it’s definitely more significant than what we saw in phase 1 going from 0 to $100k.

Another way of looking at this: After 110 months (the length of time required to hit $500,000) in this scenario, the investor would have contributed an initial $100,000 plus $265,000 in monthly contributions. With balance under the 100% equities allocation of $503,432.19, this means that the investor generated $138,432.19 in returns over this length of time.

During phase 1 of an investor attempting to go from zero to $100,000 in assets using our scenario of $1,500/month in contributions and the 100% equities allocation, the investor generated $19,960.48 in returns, or 19.77% of the balance came from returns.

In phase 2 of an investor attempting to go from $100,000 in assets to $500,000 with the same parameters of $1,500/month in contributions and the 100% equities allocation, 27.5% of the balance came from returns.

What’s the point here? The point is that when you’re working with larger numbers, more and more of your future balance will come from returns on your investments rather than your contributions. As you move from phase 1 to phase 2 and beyond, your returns will eventually begin to outweigh your savings and contributions of new money into the investments. So, the quicker you can get into advanced phases, the more wealthy you’re going to get.

This is why getting an initial chunk of $100,000 to invest is so impactful. While we got in the weeds a bit there with some specifics, our goal here was to truly quantify such an impact. Hopefully this helps.

How to invest $100k: Target allocations

Let’s speak more broadly to target asset allocations in investing. We referenced earlier that the bond allocation is often used by a formula based on age, and in the last section we talked about the effect of asset allocation on returns during different phases of accumulation investing. But now, let’s just look at general risk and return around various asset allocation models. Settling into a target allocation both for your $100k you’re looking to invest plus your general investing moving forward is a really good exercise to walk through.

I like to reference Vanguard’s personal portfolio allocation models as a basis for this discussion. we can take a look at some of their allocation data over nearly 100 years (1926-2018):

50% stocks / 50% bonds

• Average annual return: 8.2%
• Best year: 32.3%
• Worst year: -22.5%

70% stocks / 30% bonds

• Average annual return: 9.1%
• Best year: 41.1%
• Worst year: -30.7%

80% stocks / 20% bonds

• Average annual return: 9.4%
• Best year: 45.4%
• Worst year: -34.9%

100% stocks

• Average annual return: 10.1%
• Best year: 54.2%
• Worst year: -43.1%

A few reasons why I really like how Vanguard lays out this information. First, they use a really long time frame of almost 100 years. Second, you can see both the average returns and also the risk at a glance. By examining the worst year for each allocation model, you can get a feel for what the worst case draw down would look like in a really extreme market. As you can see in the 50 / 50 balanced model, the worst year is only -22.5% as compared to the draw down of -43.1% for a 100% stocks allocation.

Using this information, you can map out a baseline approach for your investments.

In the next section, we’ll expand on this topic and move into some practical ways to implement these allocations.

How to invest $100k: The three-fund portfolio

One of my favorite portfolio strategies is the simple three-fund portfolio. This portfolio approach was popularized by Vanguard enthusists. It seeks to be ultra simple, low fee and provide excellent returns. In fact, studies show that this simple approach beats most active managers who are attempting to beat the market.

The three-fund portfolio is made up of three low fee index funds to give domestic equities exposure, international equities exposure and bond exposure.

The three-fund portfolio essentially aims to provide broad, diversified exposure to US stocks, bonds and international stocks. You can get super low-cost ETFs and accomplish a very diversified portfolio that performs very well historically by just buying three simple ETF funds.

Here are examples at the three large brokerages:

• Schwab: Total Stock Market (SCHB), International (SCHF), Bond Index (SCHZ)
• Fidelity: Total Stock Market (FZROX), International (FZILX), Bond Index (FXNAX)
• Vanguard: Total Stock Market (VTI), International (VXUS), Bond Index (BND)

These funds give you an extremely diversified portfolio with fees of only a few basis points.

So, if we want to circle back to our target asset allocation models, we can now apply the three-fund portfolio to a target asset allocation mix. Let’s consider the 70% equities / 30% bonds model and let’s assume we’re using Schwab’s index ETFs in order to build the portfolio. It would look something like this:

• 70% Equities: Total Stock Market (SCHB) and International (SCHF)
• 30% Bonds: Bond Index (SCHZ)

What about the split between domestic and international equities? You’ll often see a 30% number used where 30% of your overall equities should be international. But the 30% isn’t set in stone. You might be more comfortable with 20%, for example. For example purposes, let’s stick with the 30%. As such, it would look like this:

• 70% Equities broken down into 70% Total Stock Market (SCHB) and 30% International (SCHF)
• 30% Bonds: Bond Index (SCHZ)

Or, we could do a little math and get into the specific allocations. It would look like this:

• 49% Total Stock Market (SCHB)
• 21% International (SCHF)
• 30% Bonds: Bond Index (SCHZ)

If you’re mapping this portfolio to your $100,000 investment, it would look like this:

• $49,000 Total Stock Market (SCHB)
• $21,000 International (SCHF)
• $30,000 Bonds: Bond Index (SCHZ)

How to invest $100k: Should you pick stocks?

The three-fund portfolio is boring!

I know, it isn’t sexy. But it protects you from you, and it ensures you don’t do something stupid like put the full $100k into a single stock that you have a hunch about. This is the problem with many individual investors.

In general, I’d advise against picking individual stocks for your investments. But if you must, set yourself up with some strict rules. We dedicated an entire article to this exact topic of setting up rules for yourself with respect to buying individual stocks. From this article:

I find index funds to be extremely worthwhile for a number of reasons. They are easy to understand, they are super low cost and you’re getting broad equities exposure. I believe these index funds should be your largest allocation and the backbone of your portfolio. Unless you’re near or at retirement age and your fixed income allocation is quite considerable, investors who still have many years left before retirement should probably have most of their money in simple index funds. 

That doesn’t mean I’m completely against picking stocks. I have a few myself (Netflix being my largest single stock position for years now).  But buying individual stocks should be within a fixed structure that you set up. Again, our goal here is to protect ourselves. 

Our individual stock buying rules are two-fold. First, collectively, our individual stocks are a fixed percentage of our equities allocation. I would say that this should be a maximum of 20% of your equities allocation, and maybe even less such as 10-15%. Secondly, each individual stock should be a maximum of 4% of your entire portfolio and ideally capped in the 2-3% range.

So, this is a decent starting point. if you want to buy stocks, make sure at least 80% of your equities allocation is put into the simple index funds we outlined above when talking about the three-fund portfolio. Then, if you want to allocate 20% of your equities position to individual stocks, no single stock position should be larger than 4% of the entire value of your portfolio. You might get even more strict than that, but at least use that as the minimal restrictions to implement.

So, let’s modify our three-fund portfolio example above, and add in three stocks. Let’s say the investor is obsessed with Netflix, Tesla and Apple and wants to own those stocks individually in addition to the three funds as outlined above. Using the 4% max rule, each stock will get a $4,000 allocation (4% of the $100k). The adjusted portfolio might look as follows:

• $29,000 Total Stock Market (SCHB)
• $21,000 International (SCHF)
• $4,000 Netflix (NFLX)
• $4,000 Apple (AAPL)
• $4,000 Tesla (TSLA)
• $30,000 Bonds: Bond Index (SCHZ)

Note: In the example above, we reduced the US equities ETF to grant money to the individual stock positions. In actuality, maybe you split that between the domestic and international exposure.

What types of investment accounts should you be using?

At a simple level, most people allocating a $100k chunk of money will be utilizing a simple brokerage account which has no special tax benefits.

Investing as much of the money as possible into a Roth IRA could make a lot of sense in order to let the money grow tax free. If you’re earning above the income threshold to take advantage of a Roth IRA, you might consider the backdoor Roth IRA method which is a method to get around the income limits. As we explain in our article on the backdoor Roth method:

Fortunately, for high income earners, there’s a commonly used way of getting around this income limit threshold. Essentially, you can still contribute to a non-deductible traditional IRA. This means that you can put money into an IRA, but you won’t get a tax benefit because you make too much. But, then you can then just convert that traditional IRA into a Roth IRA. By doing so, you just contributed money into a Roth IRA despite earning more than the IRS says you can in order to contribute to an IRA.

Then, you just repeat this process every year. Every year where you make too much to contribute directly into a Roth IRA, you simply contribute the money into a traditional IRA (and do not take a deduction), then convert the funds into the Roth IRA.

Again, if your new to investing, max out your Roth IRA then put the rest of the $100k balance into a simple brokerage account. If you’re further along, then you likely already have a structure setup and the additional $100k can just go into the buckets that you’re already used to contributing to.