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One million dollars might not be the fortune it once was, but it’s still plenty of money. Here’s the rub: $1 million can melt away fast if not managed wisely—but prudently invested, it can go a long way.
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Know Your Goals, Timeline and Risk Tolerance
Understanding your financial goals, timeline and risk tolerance are the key elements in deciding how to invest $1 million. It’s essential to work out these straightforward concepts first of all, since they form the foundation of any solid financial plan.
What Are Your Financial Goals?
Before doing anything else with your $1 million nest egg, define your financial goals.
Are you investing for retirement? If your retirement fund is already taken care of, perhaps you’re looking to buy real estate or save for a child’s education. Depending on your current finances, boosting charitable contributions could be important.
Record what you want to achieve and quantify your goals. Determine the annual return you’ll need to generate to achieve your objectives.
What Is Your Time Horizon?
With your goals in hand, factor in your current age and when you’ll want to spend your returns. These considerations determine your timeline, commonly referred to as your investing time horizon.
Here’s a simple rule of thumb: The longer the time horizon, the greater the allocation to equities. Shorter timelines should be allocated more toward low-risk fixed-income assets.
What Is Your Risk Tolerance?
Risk tolerance and investing timeline are two sides of the same coin. The longer your time horizon, the more risk you can take on. But as the years pass and you get older, risk tolerance declines because there is less time to recover from a market downturn.
Your temperament is a decisive factor when it comes to risk, and it’s notoriously hard to quantify. Ask yourself: How would you respond if the value of your investments declined significantly? Do financial decisions make you anxious? Do you have the fortitude to stick to a strategy even if the market plummets, or will you be the first out the door?
Your goals, timeline and risk tolerance help you choose the right asset allocation, which is the amount of money to be invested in different assets, such as stocks and bonds.
How to Invest $1 Million in Stocks
Stocks are the foundation of every investment portfolio. How much of your portfolio is in stocks depends on all the factors discussed above: goals, time horizon and risk appetite.
Your equity investment can take lots of different forms. If you have a strong risk tolerance, you might buy individual stocks. More risk-averse investors might choose equity mutual funds or exchange-traded funds (ETFs).
- Growth vs. value stocks. Growth stocks are companies that are rapidly expanding their revenue, profits and cash flow at rates well above the rest of the market. Value stocks trade at prices that are much lower than what their fundamentals suggest they’re worth, due to troubles in the market beyond an individual company’s control.
- Dividend stocks. Many companies return profits to shareholders in the form of dividends. The best dividend stocks offer double value to investors: they provide income and also offer the potential for share price appreciation.
- Preferred stock. These shares differ from common stock as they carry a set face value—called par value—unrelated to their current market prices. Preferred stock always pays dividends, calculated as a percentage of the par value. Thanks to guaranteed dividends, plus greater protection for holders in the event of bankruptcy, long-term investors prefer preferred stock.
Growth and value stocks are appropriate for more risk-tolerant investors, but each category tends to do well in different kinds of markets. To invest $1 million, you want a portfolio that can deal with all sorts of weather, so investing in both makes sense.
Investors who are more risk averse or want to generate income from their one million dollar investment might opt for dividends and preferred stocks. They generate plenty of cash flow and also allow for gradual share price appreciation.
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How to Invest $1 Million in Bonds
Bonds are a key component of a balanced investment portfolio. They offer the benefits of cash flow, diversification and capital preservation. When the stock market dips, bonds tend to increase in value, and allocating fixed-income assets is vital in any portfolio.
Companies and governments issue bonds to borrow money. Bonds have a par value, and each issue has a specified maturity date and rate of interest, commonly called the coupon. Companies make coupon payments annually or semiannually based on the interest rate and the par value.
For example, a 5% coupon on a bond with a $1,000 par value will pay $50 per year. The borrower repays the principal on the bond’s maturity date.
There are many types of bonds, and the investment decision again comes down to age and risk tolerance. The lowest-risk bonds are issued by the U.S. Treasury and are available in maturities ranging from several weeks to 30 years. Since risk and return are directly proportional, lower risk means lower coupon rates.
Bonds that are assigned credit ratings from agencies like Standard & Poor’s and Moody’s, corporate bonds are available at every point along the rating spectrum. Conservative investors usually stick with investment grades, while risk-on investors might opt for high-yield junk bonds.
Municipal bonds are issued by local or state governments to fund public projects. They’re just like any other bond save for one important characteristic: The interest income is usually free from federal, and sometimes state, income taxes. An investment in muni bonds can thus improve your portfolio’s tax efficiency.
How to Invest $1 Million in Real Estate
Investing in real estate is potentially lucrative, but it takes more work and might be riskier since the property market is volatile and prone to bubbles.
For most people, a home is their biggest investment. Homeowners usually take out a mortgage and aim to pay it off by retirement. If they want to downsize later, they sell the property and move somewhere cheaper, pocketing the difference between the sale price and the price of a smaller residence.
Investing in rental properties can generate regular income, although it might give you major headaches. Maintenance is burdensome and unreliable tenants can disrupt your cash flow. Hiring a professional management company can help, but the cost will reduce the returns.
Purchasing properties for renovation and resale can yield attractive returns. However, flipping requires significant knowledge of the local housing market and skill in reconstruction. It also entails many risks, like cost overruns, problems in obtaining permits and managing contractors.
Real estate investing can bring robust long-term returns that are independent of the stock market. But since costs and risks can run high, real estate investment trusts (REITs) may be the best choice for your $1 million investment. These real estate funds issue shares that trade just like stocks, and they pay out dividends to holders.
REIT investments are subject to greater volatility than equities, as they are highly sensitive to the state of the economy. Residential and health care REITs are less volatile, while those heavily invested in assets like shopping malls can be sensitive to a flagging economy.
How to Invest $1 Million in Alternative Assets
Alternative investments include more obscure financial vehicles like hedge funds, private equity, and venture capital as well as commodities, real estate, and collectibles like art, wine, or antiques.
Alternative assets that offer attractive benefits:
- They have a low correlation to traditional asset classes, thus improving portfolio diversification.
- They’re less vulnerable to market volatility, and some alternatives, like gold and oil, can hedge inflation.
- They also offer potentially strong returns versus traditional securities.
Higher returns suggest higher risk, however. Many alternative investments trade complex derivatives and involve risky practices like short selling. They are often unregulated and not registered with the Securities and Exchange Commission (SEC)—public filings may not be required, so little information is available to investors.
Many alternatives are not publicly traded and liquidity is low. Hedge and private equity funds may have lock-up periods that freeze redemption and high minimum investments are also the norm.
Due to the risks of alternative investments, the SEC restricts many alternatives to accredited investors only. This requires a net worth of $1 million (excluding the value of your primary residence) or an annual income exceeding $200,000 ($300,000 for married couples).
Hire an Advisor to Help You Invest $1 Million
With $1 million to invest, it makes little sense to go it alone. A financial advisor can provide objective and informed guidance to help you attain your financial goals.
When we consider the world of financial advisors, we are spoiled by choices. Some, but not all, have a fiduciary duty to their client, meaning they are legally obligated to work in your best interest. Their fees can be based on a percentage of assets under management (AUM), an hourly rate or a flat rate—the latter model eliminates conflicts of interest.
The majority of fee-only advisors are fiduciaries, while advisors who earn commissions are not. They generate their income via commissions on the products they recommend and are held only to a standard of suitability: they are required to offer products suitable to you, but there’s nothing to stop them from suggesting one that will generate the highest commission, even if it isn’t the very best choice for your portfolio.
When choosing a financial advisor, credentials, experience, and fiduciary requirements are vital elements in the mix. Just as important is finding the right personal fit. Your financial advisor will be privy to confidential information and will be there when you need to navigate challenging life events, such as births, deaths, divorces and more.
A trusted professional at your side can help you stick to your plan and achieve your personal financial goals.