You just got your annual bonus or a big sales commission, found out you are unexpectedly receiving an inheritance from a long lost aunt, or maybe after years of savings you have this large amount of money sitting there earning 0.5% on a CD.
Now you’re sitting there staring at your checking account balance with no idea what your next move should be.
Here are some ideas for you to explore on how to invest your money without messing it up.
Invest it yourself
You may want to try your hand at investing the money yourself. You love watching CNBC, right? Trading on the news is a dangerous strategy. Often times the press just reports on the theme of the day (or minute) without a consideration for the long term results of those actions. Market news tends to be very trading focused which emphasizes the short term. Are you in it for the next best trade or do you have a longer term goal in mind?
Doing it right means taking the time to put effort into the proper research. Did you ever consider how much time is actually required to manage your own money? Putting in less time than needed would essentially be treating the task of managing your future and retirement as some kind of hobby – should it really be looked at that way?
Or let’s say that you did commit the time, which can be up to 40 to 60 hours a month. How does that fit into the rest of your life? Are you expending valuable resources that could otherwise be enriching your life in other ways? The time you would spend watching the markets could be very high relative to rewards.
It sounds great to do it yourself for free – but here’s where it gets expense. Investing in the wrong single stocks or funds can result in expensive mistakes without the right research tools. Doing it this way can possibly expose you to expensive trading prices and high commissions relative to the return you’d get.
Hire a financial advisor to invest it
Maybe you’ve gotten some marketing pitch from a financial advisor you know, or one has reached out to you over the internet. Before you decide to engage, consider that many advisors will put your money into high commission products that benefit them more than you.
The unfortunate reality is that a portfolio of $100,000 or less would be too small in their eyes for them to devote any serious attention. They wouldn’t be interested in conducting in depth research and analysis for what they would make off of your portfolio.
A portfolio of less than $100,000 would most likely be below the minimum amount required by many of these advisors, which would mean that they are going to try to offer you financial planning services and make their fee that way. Many advisors charge $3,000 or more. Do you really need a financial plan?
Also consider that in many cases, financial advisors cost the client more than they benefit them. Read this for more information. Here’s a summary: they may dump your money into hot, trending funds and/or be more preoccupied with meeting new clients than paying attention to you. They may put your money into a naïve model portfolio that is not based upon sound research or fail to rebalance your account because they are too pressed for time to do any better.
Invest in a business venture
Most people have a friend who has tried his or her hand at entrepreneurship and has a hot, promising venture to pitch. The reality is that most of these startups don’t work out. Even the most skilled of venture capitalists admit this is like playing scratch tickets.
If you were to invest in a business venture, the diligence required can take quite some time. You’ve got to do the math and even if it looks good on paper an onsite evaluation is necessary as well. Many of these opportunities are illiquid and will lock up your money for a long time. And then there’s the risk of scams and fraud.
Not as simple as you thought, no?
Take a vacation
Forget about the long term, you may say. I’ve always wanted to vacation in Aruba – let me live it up while I still can!
There’s no doubt that time off is a good option for the short term. However, in the long term the stresses of life won’t go away for all the money you spent
Pay off debt
Knocking out your debt is a noble move to make once you have the money to do so. Attitudes towards debt tend to vary. Some people consider it a four letter word (which is it, literally, by the way) while others are comfortable carrying debt if it is at low interest.
Consider what the potential returns are for investing the money and weigh that against the interest rate you are paying on your debt. Given this, what makes sense to do?
Buy cash value insurance
Financial advisors and insurance agents love to sell the story of cash value life insurance. They tout all sorts of benefits, from the guaranteed crediting rate to the protection from creditors it provides, and more. While it’s true that these features may carry some benefit, think about how this lines up with your situation.
If you have $10,000 to your name, cash value life insurance may be hard to sustain over the long term. You can’t overfund the policy by investing a huge lump sum because above a certain amount, the policy will fail to meet the statutory definition of a life insurance contract. You’d lose some of the tax benefits of the policy.
So since the amount you can invest initially is limited, you’d likely be left with an obligation to pay a monthly or annual premium – and these premiums can really be quite high!
Cash value life insurance sounds good but for someone with $10,000 to invest, this option could be expensive and unsustainable in the long run.
Invest with a digital advisor (roboadvisor)
If you had $10,000 and didn’t know what to do with it, investing with a digital platform is probably one of the better options to consider. Roboadvisors will do the research for you and determine what the best types of investments are. These platforms will also provide you with access to these funds and may possibly provide allow you to invest in funds that you would otherwise not be able to access as an individual investor. Many roboadvisors will offer strategies such as “Direct Indexing”, which allows you to own a basket of stocks outright as opposed to owning them through an ETF or mutual fund. Such investment approaches are difficult and timely to execute on your own.
In general, roboadvisors are less costly because you can execute trades for lower commission. As you are institution through an institution rather than on your own, you may be able to reap a better price for your trade than if you were to invest on your own.
Not sure how to get started? Read “Start Investing with a Roboadvisor in 3 Easy Steps” before you start investing with one.