How to Invest $500k Wisely in 2023

The post How to Invest $500k Wisely in 2023 appeared first on Millennial Money.

So you want to know how to invest $500k. First off, congrats, that’s a sizable amount of money and halfway to a million dollars. It likely took a lot of frugality and smart decision-making to get there.

And with $500K at your disposal, there are a lot of sound investment options for you to build a diversified portfolio and continue growing your wealth.

Money generates money and the larger the starting figure, the greater your potential return.

This article will cover the best ways to invest $500K in 2023 and address common reader questions related to different avenues of investment.

Best Ways to Invest $500K

There are many options to consider, each has its pros and cons, which makes it critical to pursue multiple opportunities to maximize your return, balance the risks, and best align with your overall goals.

• Use a Financial Advisor
• Stocks and ETFs
• Robo-Advisor
• Mutual Funds
• Fixed-Income Investing
• Land
• Real Estate
• Alternative Investments
• Invest in a Business
• Hedge Funds

1. Use a Financial Advisor

If you are looking to invest $500k, speaking with an expert about your financial situation could be the most important thing you do to protect and grow your wealth.

A financial advisor can help you identify your risk tolerance, how much money you will need to save for your children’s college or your retirement, and strategize ways for you to pay for end-of-life care.

Beyond stocks, bonds, and investments, they can also provide guidance for other financial products like disability insurance, life insurance, trusts, and tax-advantaged instruments. And there’s the peace of mind that comes with knowing an expert hand is guiding you, so you don’t lay awake second-guessing the money decisions you alone made.

Our number one pick for investment advisors is the team at J.P. Morgan’s Personal Advisors Service. With roots dating back to 1799, J.P. Morgan is a trusted name in the finance world. Working with their personal advisors connects you to a team of experts who can create a customized plan for your unique goals.

The team offers expert advice and can assist in handpicking the best portfolios or rebalancing your accounts. Their clients get continual personal support. Typically there are annual fees of up to 0.6 percent.

INVESTMENT AND INSURANCE PRODUCTS ARE: NOT A DEPOSIT • NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE

2. Stocks and ETFs

$500K sitting in a savings account at the bank isn’t going to grow very quickly. Bank account savings rates are notoriously stingy.

While there are some decent, high-yield savings account options, your money will grow a lot more quickly by investing in stocks, index funds, and exchange-traded funds (ETFs) which are bundles of securities tied to an underlying index like the S&P 500.

These stock and ETF investments can provide a lot more diversification and better long-term growth but they do require some upfront research and ongoing monitoring.

With the potential to see stock market returns of 10 percent, you could turn your $500K into $1 million within seven to eight years. And if you left that figure invested for 20 years, without making any withdrawals, you could have nearly $3.36 million assuming the funds averaged the same rate of return annually.

This substantial end figure demonstrates the power of compound interest. Not only do you make interest off your initial sum invested but you make interest off of the interest. In our scenario, you’re making interest off of more interest for 20 years in a row, which is how you can grow your money by over 500 percent.

Swings in the Market

There can be highs and lows in the market and it’s possible to lose funds. This is where risk tolerance and diverse asset allocation come into play so you aren’t putting all of your eggs in one basket. $500K is a lot of money, likely a sum you can’t afford to lose.

A financial advisor can help you evaluate how to best spread out the risk, whether it’s putting all of your funds into medium to low-risk funds, or putting a portion of your funds into high-risk and allocating the rest into bonds and more conservative assets.

Time-based or target-date-based funds are another way to balance swings in the market. Upfront, the goal is to grow your money as aggressively as possible. But as you near your target date (often for retirement), your money is put into more conservative or less risky funds and assets.

3. Robo-Advisor

A robo-advisor is what it sounds like; a robotic investment platform that uses algorithms to distribute your funds into the best selections based on your preferences and available market data.

Fintech (financial technology) is especially popular among millennials, who embrace robo-advisor technology by using apps like Betterment and Wealthfront.

These automated apps offer many benefits:

• Computer algorithms to build the most optimized portfolios
• Automated portfolio management, including rebalancing
• Lower costs (commission fees) than traditional financial advisors
• Hands-off approach

Beyond fintech apps designed for DIY millennial investors, many traditional investment firms like Charles Schwab and Vanguard now also offer robo-advised accounts.

4. Mutual Funds

A mutual fund is an investment that pools together money from many different investors and then invests it in a range of securities including stocks, bonds, and money market instruments.

These funds are managed by professional investment managers; they are charged with selecting the securities and funds in which to invest the group’s funds.

These funds can offer an easy way to diversify your investments with a potential for much higher returns than traditional ETFs, however, these funds typically have very high management fees. Some firms, however, like Vanguard, do have lower expense ratios.

5. Fixed-Income Investing

Fixed-income investing is a low-risk investment strategy that involves putting your money into safer, more conservative assets that can provide a steady stream of income through dividends or interest.

This type of investing typically involves generating loans for governments, banks, or business corporations and then receiving interest for these loans in the form of government, corporate, and municipal bonds.

This strategy can enable you to lower your risk, preserve capital, and earn passive income.

Fixed-income investing is popular because it is generally very low-risk. However, this means that there is much less growth potential.

Keep in mind, however, that low risk doesn’t mean no risk. A government or other “secure” issuer of bonds can default on their payments.

6. Land

Investing $500k in land can be very lucrative, however, it’s often a long game. It can take several years to generate any income from this type of investment.

Different land investment options include raw land (completely undeveloped), agricultural land, commercial land, or residential land. You can use the land to hold it as is and then flip it when market conditions are right, develop the land and hold it indefinitely, or develop it and sell it for a profit.

Land can be purchased directly from its owners, or through ETFs and exchange-traded notes (ETNs). There are diverse ETFs and ETNS for land-based investment options including farming, livestock, precious metals, minerals, or timber.

Buying any land can be considered speculative because of market volatility. There’s a possibility the land will not generate any income or capital gains.

7. Real Estate

Real estate investments like rental properties or real estate investment trusts (REITs) have outstanding growth potential as well as the ability to provide stable income.

A REIT is a company that owns real estate across a variety of sectors, including retail, residential, healthcare, office, and other commercial entities. Most REITs are traded on major stock exchanges and you can also buy REIT shares in an ETF or mutual fund.

There’s less start-up capital needed to purchase real estate through using a REIT. You can get started for as little as $1K.

And holding real estate can increase your overall net worth and diversify your portfolio. In some circumstances, real estate can provide tax benefits through capital gains tax exclusions or 1031 exchanges.

8. Alternative Investments

There are other alternative investment options to consider, including fine art, collectibles, precious metals, commodities, or cryptocurrencies like Bitcoin or Solana.

There are many benefits to these non-traditional ways to invest:

• Potential for higher returns
• Diversification of your portfolio
• Commodities can be a good hedge against inflation
• Potential tax benefits

These alternative investments do carry more risk than traditional investments and it may take longer for you to see a return. Additionally, because alternative assets are illiquid, it’s harder to value them. Any appraisal or fair market value may fluctuate wildly from the ultimate selling price.

These assets may present some additional challenges as well. These types of investments are often much less regulated than traditional investments, are harder to acquire (going through a middleman), or require greater upfront capital. And with tangible commodities, like gold or precious metals, there are additional tax complexities.

Nevertheless, many alternative assets are a good way to add variety. You need to weigh the risks versus the benefits and take into account your other investments, assets, and long-term goals.

9. Invest in a Business

Investing in a business may generate a tremendous amount of long-term growth, but this requires significant research and due diligence.

Assuming that you are not a shark (from the eponymous TV show Shark Tank) being privately solicited by a business owner, there are other ways to go about investing in up-and-coming businesses.

• Venture capital (VC) firms. VCs typically invest in early-stage companies. It’s a riskier investment but with the potential for very high growth.
• Angel investing is a form of VC investment, however, angels typically invest much smaller sums than venture capitalists. There is still the same high degree of risk you’ll lose money.
• Private equity firms. Here, investments are made in privately held companies. Typically, private equity firms invest in companies that are established but have good potential for growth.
• Crowdfunding platforms are another way for you to invest in start-ups that are seeking small investments from a large crowd of investors. With some programs like GoFundMe, businesses may be seeking donations and offer no return for your contribution. For investment-based crowdfunding, SeedInvest, WeFunder, or StartEngine are three platforms to consider.

Make sure you understand the hazards involved with investing in businesses. It requires a stomach for risk and a desire to help new businesses and new technologies succeed. Also consider how long it will take you to see a return on your investment, and the type of businesses that you want to champion.

If you do want to pursue business investment, you may need to bring at least $25K to $50K to the table. We highly recommend you speak with an investment advisor before you pursue this strategy.

10. Hedge Funds

A hedge fund is a high-risk, high-reward type of investment with the aim of making a huge return.

These funds are organized as limited partnerships and they pool together funds from accredited investors. The hedge fund manager invests the funds in stocks, bonds, commodities, and derivatives.

While the hedge fund manager’s goal is to bring in high returns — much higher than in more traditional stock market investments — while minimizing risk, these funds are much more volatile. They involve very complex investment strategies and the assets are often illiquid. Additionally, these funds are not regulated by the Securities and Exchange Commission (SEC) so there is much less protection for investors.

Participation in a hedge fund may require a minimum initial investment of at least $100K and you must be an accredited investor. It can take a few months to a few years for you to see a significant return, and there are management fees.

If you are considering this option, make sure to do your research and talk to an accredited financial expert. While a hedge fund is not a good choice for a beginner investor, it may be one option to consider down the road.

Investing $500k: Considerations

Passive vs Active Investing

Do you want a more hands-on or hands-off approach?

• With active investing, you are more directly involved. This is for investors who are interested in researching and closely following companies, and who will buy and sell stocks based on their future performance expectations. Here, you may work with a funds manager who selects individual stocks and investment options, with the goal of outperforming the market average.
• With passive investing, you invest in a group of stocks and other assets called an index. With this approach, you’re in it for the long haul regardless of day-to-day fluctuations. Generally, the goal is to see an average market return instead of trying to beat it.

Learn More:

• How to Start Investing

Diversify Your Investments

Spread out your investments to minimize your risk and maximize your overall potential average returns. If you’re interested in pursuing cryptocurrency, don’t put all your funds into that asset class. Some of your money you may want to tuck away in traditional stock market investments and a CD at your bank.

Balanced Portfolio

A balanced portfolio contains a mix of different asset classes, such as stocks, bonds, and real estate. It can limit the overall risk and make your portfolio more resilient to market fluctuations.

Emerging Opportunities

New technologies, industries, and start-ups are exciting and have the potential for high returns, but they can bear much higher risks. With any emerging opportunity, there are more unknowns because there’s a lack of performance data and potentially wild volatility in performance.

However, keeping informed about these new opportunities and investing some of your funds in the more promising ones could help you get in on the next big thing.

Frequently Asked Questions

How long will it take to turn $500K into $1 million?

How long it would take you to double your money will depend on the investment’s annual rate of return (AROR). Here are a few scenarios based on different annual rates of return:

• 5% AROR: 14 to 15 years to double your investment
• 7% AROR: 10 to 11 years to double your investment
• 10% AROR: 7 to 8 years to double your investment
• 12% AROR: 6 to 7 years to double your investment

Can I live off the interest of $500K?

Probably not. If you saw 7 percent interest every year, that would be $35K. While that could be enough cash flow for you to live very modestly in the short run, it doesn’t take into account major medical bills (41% of Americans will experience medical debt), college tuition, a house down payment, retirement savings, or building an emergency fund.

With a higher return on investment, you could generate more funds to live off. However, a higher-risk investment is more volatile and you could lose money.

Even if targeting a 7 percent return, there’s no guarantee you’ll see at least that amount every year. If one year there was a downturn and you saw a 5.5 percent return, you would have 21.4 percent less to live on, winding up with $27,500 for the year.

You could potentially take a hybrid approach and live off the interest of $500K that you supplement with a side hustle or non-traditional work like freelance writing or graphic design, walking dogs, delivering groceries, or teaching English online.

What is a good return on a $500,000 investment?

A 10 percent annual rate of return, that may be subject to capital gains taxes, would be a solid return on your investment and a reasonable target.

Historically, the S&P 500 has averaged a 9.89 percent rate of return over the past 30 years. Over the past 10 years, it’s averaged 14.83 percent or 12.37 percent when adjusted for inflation.

This 10 percent figure is often a benchmark goal for long-term investments. For shorter-term goals, investors may target at least 7 to 8 percent.

A good return on a $500,000 investment depends on your risk tolerance, investment goals, and market conditions. Historically, the stock market has averaged a 7 to 8 percent annual return, which may be subject to capital gains taxes.

To determine a good return for your specific situation, consider your investment objectives, risk tolerance, and the potential risks and rewards associated with various investment options.

How long will $500K last in retirement?

According to the 4 percent rule, $500K could last you for up to 30 years in retirement. However, this does not mean you could live off $500K for 30 years of retirement.

The 4 percent rule is a guideline for making your retirement savings last. It states you can withdraw 4 percent of your retirement savings in your first year of retirement and then withdraw that same amount, adjusted for inflation, every year thereafter.

So if you had $500K set aside in a retirement account, you could withdraw $20K in the first year. And if in the second year, there was 3 percent inflation, you could withdraw $20,000 * 1.03 or $20,600.

With additional social security benefits, it could be possible for some to stretch the $500K through a modest retirement. $20K a year works out to $1,666.67 a month. When you add in the average monthly social security benefit of $1,781.63, that total monthly figure could reach $3,448.30.

How Should You Invest $500k?

There are many ways to invest $500K so it continues to grow interest year over year and create long-term security and even financial freedom. How you choose to invest those funds depends on your approach to personal finance and broader life goals.

Make sure you understand your risk tolerance, and different options, and look for ways to create a balanced and diverse approach.

The post How to Invest $500k Wisely in 2023 appeared first on Millennial Money.