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How To Invest $500,000 For Income And Growth

How to Invest $500,000 – Tips for Growing and Preserving Your Wealth

Today, we want to answer the important question, “What should I invest in with 500k?” Why $500,000 in particular? Because $500k is a common and reasonable target for a retirement nest egg, if you live in a lower cost of living area.

With $500,000, you could retire comfortably, assuming you invest it wisely, and live conservatively.

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Things to Keep in Mind Before You Invest $500,000

Before considering where to invest $500k, make sure you understand your investment goals, timeline for this money, and risk tolerance. Also, consider your other assets. If you have other investment assets, think about how this investment will fit in with your entire portfolio.

Also, you are best advised to handle a number of important issues before you go headlong into investing your nest egg. I’ve created a short checklist of things you should probably handle first:

Create a Solid Emergency Fund

Aim to have an emergency account of at least three times your average monthly expenditure. This allows you to handle most unforeseen events that life throws your way without having to dip into your investment portfolio.

Pay Off Any Existing or Ongoing Debts

It is almost always better to pay off your debts when you have the ability to do so. Moreover, missing debt payments can damage your credit score and incur fees, whereas missing an investment (e.g., skipping a dollar cost averaging investment) has no tangible downside.

Open a Retirement Savings Account

Don’t forget that a retirement investment portfolio is best managed under an account meant for retirement. An IRA or 401k is a way to save and invest money which includes tax benefits.

The Basics of Investing $500,000 – A Diversified Portfolio

Diversification can seem complicated, but the extra work involved goes a long way in reducing your portfolio’s risk. Essentially, you want to ensure your portfolio holds many different asset classes so that a downturn in one asset class doesn’t significantly affect your portfolio’s performance. Diversification is – in essence – the tried-but-true phrase “don’t put all your eggs in one basket” applied to finance.

The reason diversification works lies in the fact that different asset classes are not strongly correlated. For example, an index fund and treasury bills rarely move in the same direction. However, the stock market and a stock mutual fund will likely move in the same direction, and thus holding a stock market index fund and stock mutual funds exclusively can lead to large losses when the market pulls back.

How to invest $500k for Income and Growth?

Once you clarify your financial goals, you’ll be able to diversify properly. Your financial goals will tell you whether you should focus on short term investments, how much risk you can accept, and what sort of growth you seek. Then, you can logically find the best way to invest $500k for you, and spread your assets among the following investment categories.

When you invest $500k for income, you’ll focus on dividend stocks, bonds, and cash assets. If investing for growth, you’ll want greater percentages of stock investments. This is because investing in stocks offers the opportunity for greater long term returns for the cost of more volatility in the value of your investments.

Where Should I Invest $500k?

Take a look at these investments and consider whether they will be suitable for your investment strategy. Pros and cons follow.

1. Cryptocurrency

Let’s start with an alternative investment that is flooding the media today. Cryptocurrency is hot right now, but it is risky and falls into the category of alternative investments.

Read about alternative investments here.

In any case, due to its risk, cryptocurrency should only occupy a small percent of your portfolio. The average financial advisor would recommend dedicating around 5% of your capital – $25,000 – to cryptocurrency. Bitcoin, Ethereum, and Monaco are popular choices for cryptocurrency investing due to having unique features (leader advantage, contracts, and anonymity, respectively).

Pros:

  • Can provide outstanding returns on investment
  • Uncorrelated with most other assets
  • Many different choices outside the major players, with new cryptocurrencies popping up every day

Cons:

  • Extremely volatile
  • Has become more correlated to the stock market recently
  • Lots of scams as well as pump-and-dumps once you stray from the major players

How to invest in cryptocurrency:

2. Real Estate

While on the topic of alternative investments, real estate investing sometimes falls in this category. However, real estate investment strategies come in many flavors, and you don’t have to outright buy a property in order to invest in real estate. This is good to know, as – just with cryptocurrency – real estate should not constitute a major part of your portfolio if you wish to remain diversified.

Pros:

  • Tangible; physical property will always have market value and cannot fall to $0 like a stock or bond can
  • Real estate investment trusts (REITs) and real estate crowdfunding allows you to invest in property with small amounts of cash
  • Can create steady income from rental properties

Cons:

  • Risky; at the whims of the housing market
  • Risky; at the whims of the Federal reserve interest rates
  • Real estate is less liquid and harder to sell than other investments

How to invest in real estate:

  • Buy real property and rent it out, or fix it up and resell it
  • Buy REIT ETFs thought your investment brokerage account
  • Invest in real estate crowdfunding platforms, like Diversyfund

3. Stocks

Investing in stocks is essentially investing in companies. This is the most popular form of investment – and with reason: the stock market has shown to be extremely profitable, with pullbacks that eventually reverse over time. That is, while stocks are somewhat risky, over time the risk/reward has paid off for those investing in stocks.

With half a million dollars to invest, you should consider putting somewhere around $250,000 into stocks and/or stock funds (covered next).

Pros:

  • Dividend-paying stocks provide passive income
  • Over the past 100 years the average stock market investment has earned about 10% return-on-investment per year
  • Stocks, chosen well, might outperform the market and funds

Cons:

  • Stock-picking is notoriously difficult
  • Individual stocks, as an investment, produce less diversification than do funds (unless you own at least 20 individual stocks from diverse industries)
  • Proceeds from appreciated stock sales produce taxable capital gains

How to invest in stocks:

  • Open an account with a large investment broker like Schwab or Fidelity
  • Invest in stocks through an app like Robinhood, M1 Finance or SoFi Invest

4. ETFs and Mutual Funds

Funds are collections of stocks, bonds, or other financial assets, often aimed at investors who want instant diversification. When you invest in a fund, your money is pooled with that of other investors, and the fund buys a basket of assets. The selection process is either passive, in which the fund attempts to mirror an index (such as the S&P 500 ) or follows a rigorously defined set of rules (as in only buying stocks that offer large dividends), or actively managed, in which a fund manager chooses the stock.

Funds come in various varieties. Exchange traded funds and mutual funds are the most common.

Pros:

  • Completely hands-off; the fund manages a portfolio for you
  • Instant diversification
  • Risk is distributed among many stocks and/or sectors

Cons:

  • Less control
  • Holding multiple funds in your portfolio can cause sector overlap and overexposure
  • Many active funds, and some passive funds, come with high fees

How to invest in funds:

  • Open an account with a large investment broker like Schwab or Fidelity
  • Invest in funds through an app like Robinhood, M1 Finance or SoFi Invest
  • Within your 401k workplace retirement account

5. Robo Advisors

The robo advisor is a relatively new concept. It popped up in response to the high fees charged by financial advisors and active funds. The traditional 1.5% management fee a fund manager or financial advisor might charge is the equivalent to $7,500 per year for a $500,000 account, and so the sub-1% fees robo advisors charge is more cost efficient for six-figure investors. Many robo-advisors, like SigFig, SoFi and Betterment also have access to financial advisors.

Pros:

  • Essentially the same software used by financial advisors and robo-advisor; the middleman is simply cut out
  • Minimum deposits are typically small, so you can try the robo-advisor out with a smaller initial investment
  • Everything is automated for you, from dividend reinvestment, tax-loss harvesting to portfolio rebalancing

Cons:

  • Usually, buying ETFs on your own is cheaper
  • Robo advisors’ funds are often just a bunch of ETFs you could have bought yourself
  • Some robo-advisors don’t provide access to financial advisors, although there are quite a few hybrid robo advisors with automated investing and human financial advisors

How to invest in robo-advisors:

  • It’s fast and easy to sign up for robo-advisors, directly on their platforms
  • Get a take a robo-advisor quiz to find out which one is best for you

6. Bonds

Bonds come in many forms and are considered safe investments. For this reason, many financial advisors recommend 40% of retirement funds be placed in bonds. That’s around $200,000 in bonds for your account – a large lump sum. Although, with interest rates so low, there is some controversy concerning whether bonds are as good an investment now as in the past.

Bonds are quite versatile, allowing high-ish yields with moderate risk, such as in the case of corporate bonds, or offering lower yields with virtually no risk (e.g., government debt), acting like a high yield savings account. If you think the above investments are too much risk, consider putting a sizeable chunk of your capital into bonds. Although, individual bond investing is typically not recommended for those with less than $50,000, as you’ll need to choose several bonds to achieve appropriate diversification. In that case, bond funds are preferred.

Pros:

  • Inflation bonds can protect your cash against inflation
  • Can replace your emergency fund (move your emergency fund into short term bonds, and sell the bonds when you need cash)
  • Low risk

Cons:

  • During a random period of time, stocks almost always outperform bonds
  • If an individual bond is sold before maturity it might be worth less than you paid for it.
  • Bonds typically return less than stocks over most periods of time

How to invest in bonds:

  • Call the bond, or fixed income desk of your investment broker for guidance
  • Screen the online fixed income offers on your investment brokers website
  • Choose a diversified bond fund like iShares Core U.S. Aggregate Bond ETF (ticker: AGG)

Learn more: Are Bonds A Good Investment Now?

7. Commodities

Commodities are the tangible materials driving the world economy. This investment option includes metals, such as tin; agriculture products, such as rapeseed; and energy, such as propane (but not propane accessories). I just gave examples of some of the least popular investments in each category, but I bet you didn’t know you could invest in rapeseed, for example.

The point is that if you have some knowledge of a trend in some commodity category, you can probably invest in that trend. You can apply future contracts for these sorts of investments, but that’s a highly risky strategy. Probably your best bet for investing in commodities is through ETFs that buy future contracts for you, but without the unlimited risk that comes with futures.

Commodity ETFs constitute a nice addition to a fleshed out stock/fund portfolio. Consider looking up these tickers for ETFs that give you exposure to commodities: GNR, for natural resources; SLV, for silver; and MSOS, for cannabis.

Billionaire investor Ray Dalio, recommends roughly 7% invested in commodities in his all-weather portfolio. While Warren Buffett, ignores this asset class.

Pros:

  • Commodities always have value because someone – somewhere – has a need for that commodity, whether it be an airline that needs oil or a jeweler that needs gold
  • Commodities drive inflation, thereby being a good inflation hedge as an investment
  • Commodities can have strong momentum, allowing you to ride a trend upward

Cons:

  • The primary actors in the commodities markets are companies hedging their input and output costs; thus the commodities market acts quite differently than the stock and bond markets
  • Commodities, by their nature, produce no yield and are thus zero-sum on average, over time
  • Commodities have strong momentum, pulling many unprepared investors into prolonged bear markets

How to buy commodities:

8. Options

An option is a contract that gives you the right to buy (for call options) or sell (for put options) a stock, ETF, or ETN at a given price by a certain date. Because they do not obligate you to act (i.e., buy or sell) and because they can be mixed and matched, options give investors many types of opportunities that are unavailable from simply buying or shorting stocks. This means that you can manipulate the risk/reward of an investment once you learn how to use options.

Though complex, options are useful and popular and the web has many free educational materials.

Pros:

  • Allow for speculation on price movements in a stock or ETF without requiring you to take a position in the stock or ETF, reducing risk
  • Can profit from sideways and downward trends in the stock market
  • You can control a large amount of a stock or other asset with a relatively small investment
  • Can work in tandem with your stock positions, acting as insurance (e.g., protective puts) or extra income (e.g., covered calls) –

Read more about conservative options strategies here.

Cons:

  • When buying options, you might lose the entire cost of the option purchase
  • Your brokerage account will need to “vet” you before it allows you to play complex options strategies
  • Learning options requires much more time than does learning how to invest with stocks

How to invest in options:

  • You can buy an actively managed fund that trades options.
  • The CBOE and other reputable sites offer options courses to learn how to trade options on your own. Try a paper trading account, before deploying your own money.

9. Hedge Funds

Hedge funds are actively managed funds but with the caveat that only accredited investors can invest. This investment vehicle class requires a high minimum initial investment. Some hedge funds are less liquid than investments that trade on the public markets and require you to lock up your money for longer periods of time. As a way to invest, hedge funds give you access to expert fund managers who are otherwise unavailable to small-time investors.

Pros:

  • Access to proprietary algorithms and investment strategies unavailable to the general public
  • Can provide returns inversely correlated or uncorrelated to the market
  • Low stress and low time investment; you outsource your investing to an expert, who takes care of all the managerial issues of dealing with a portfolio

Cons:

  • “2 and 20,” which refers to the fact that the average hedge fund requires payment of 2% of your investment per year for management and 20% of your profits
  • Hedge funds aren’t always “hedged,” meaning that sometimes they actually are correlated to the market
  • Statistical studies have shown hedge funds to underperform the market, in general

How to Invest in Hedge Funds:

FAQ

What is the yearly interest on $500k?

Depending upon the underlying investments, the yearly interest or returns will vary. Interest payments on cash accounts are quite low, although they will be rising soon. The annual payment for 1.5% interest on $500k is $750. While a combination of high income stocks and diversified bonds or funds might yield a 5% annual return, which equates to $25,000.

How can I grow $500k into $1 Million?

The investing world provides way too many choices for you to turn a half million dollars into a million, and so the answer boils down to your risk tolerance and time horizon. The more time you allot, the easier it is to grow $500k into $1 million. A financial advisor would typically recommend investing regularly in a diversified portfolio of stocks, bonds, and alternative assets. With this advice, assuming that you earn 7.00% annually per year, it will take you roughly 10 years to double your money. If you choose a riskier assets, like cryptocurrency and technology stocks you might earn higher returns, and double your money more quickly, or suffer greater losses.

How much do I need to invest to live off returns?

The answer depends on your lifestyle and other sources of income. But, let’s take a hypothetical example. Let’s say at 65, you retire and have $15,000 per year coming in from social security and have grown your $500,000 to $1,000,000. An easy solution would be to put your savings into an annuity, which is a life insurance product that pays you for the rest of your life. Depending on the annuity, with $1M, you can probably get around $55k per year in payments (or 5.5%) at the age of 65. With your social security income and annuity payments, that’s about $70k of income per year for the rest of your life. Try this retirement calculator for more exact details.

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