What are the best ways to invest 100k if your goals are early retirement and achieve financial independence?
There are a few wrong answers: don’t blow the entire sum on a crazy night at the casino or take a gamble on a random cryptocurrency that some guy online need promised would give good returns.
But there’s no one right answer. We all have different risk preferences, goals, and knowledge bases. Of course, if early retirement is the goal, getting your calculations right becomes super important.
By the way, if your saving goals are a little more attainable and you’re looking to put away 10K, Todd at Invested Wallet wrote a great post on the subject.
So, without further ado, let’s take a look at how to invest 100K.
Best for: industry or product experts
Let’s start simple. Stocks are often the easiest concept for inexperienced investors to understand: you’re essentially paying to have a tiny stake in a company.
Investing in the stock market is an intuitive process. It’s tempting to pick out a company that seems to be doing well — like Netflix or Google — and assume it’s a safe bet for your money.
Meanwhile, the Gap stock price has decreased by around 40%.
Stock performance is extremely hard to predict.
Who could have guessed last December that cruise and airline companies would be close to collapse? Or that the share price of Zoom (the mobile components manufacturer) would shoot up in value because investors mistook it for Zoom the video conferencing technology company? Not me.
Putting all your eggs into one basket — or even multiple baskets — is a risky business. Many investors still go ahead.
If you know a lot about a certain industry and how to assess the long-term potential of a company, you could make excellent returns. Some of the most popular online trading platforms are:
You can also use these websites to trade some of the other items on this list, like ETFs, options, and futures.
If you’d prefer not to take the gamble, choose something more conservative.
Best for: removing some of the risks from day trading
If you decide to try day trading, you might be surprised by how much your mental state affects your decisions.
I’ve learned the hard way that it’s easy to let your emotions get the better of you and you become carried away, or rash when you trade. Especially if you’re a beginner.
One way to protect yourself from this phenomenon is through mirror investing: automatically copying the trades of more experienced investors by linking your account to theirs.
Mirror trading was first introduced as a Forex strategy, but you can now use it for various kinds of trading.
This removes a lot of the pressure, risks, and time commitment.
But remember — even the most experienced traders can make mistakes. Plus, the management fee (around 1%) means that if you have a commission to pay, you’ll need to make a significant profit for mirror investment to be worthwhile.
One of the biggest platforms allowing mirror investing is Etoro, which lets you select a trader to copy based on their past returns. Currently, they only offer cryptocurrency trading.
- Less risk
- Removes rash and emotional decisions
- Even experienced traders make mistakes
- Must pay a management fee
Best for: inexperienced investors
If you want to stow your money away, forget about it, and come back to a nest egg decades later, a mutual fund is an excellent bet.
Wealth management companies collate mutual funds from many shares and bonds, giving you a diversified portfolio and a respectable return with no almost no effort on your part.
I don’t mean that in a derogatory way, for the record.
There are plenty of experienced investors who prefer to invest in mutual funds or ETFs (more on these later) over anything fancy — because, well, why wouldn’t they?
Irrespective of your investing experience, there are some excellent options if you simple want to track the market. Do a little research though before taking the plunge; At times, when a firm offers both a mutual fund and ETF, at face value, it may look like they offer the investor the same thing.
The Pareto principle says that 80% of outcomes come from 20% of our efforts. How does this relate to investing?
The S&P has enjoyed an average annual return of around 10% from 1926-2018 — that’s a whole lot more than what you’d get from sticking your money into an average savings account.
Yet even if you put your heart and soul into learning about investment, there’s no guarantee you’d make significantly more than that 10%.
Mutual funds are the perfect option if you’re not an investment nerd like me and would prefer to sit back whilst your money works for you.
However, you’ll be paying a premium to the company that manages the fund and you’ll never be able to “beat the market.” A fee of 0.5% might not sound like much, but don’t underestimate how much that could eat into your profits.
You can buy mutual funds once per day when the market closes — these are long-term investments and not suitable for day trading.
- Low risk
- Limited knowledge needed
- Can be expensive
- Less chance for abnormal returns
Exchange-Traded Funds ETFs
Best for: day traders
At first, ETFs and mutual funds seem almost the same.
They’re both funds that contain a diversified mix of assets. However, look beyond the surface and there are some clear differences.
For one, you can trade ETFs during market hours. This means ETFs are better for short-term investments or anyone who enjoys actively trading, whilst mutual funds are more of a long-term option.
Because companies don’t have to actively manage ETFs, they’re much cheaper — the broker will charge a commission, but there are no operational fees.
For anyone happy to play a more active role in managing their portfolio who still doesn’t want to take significant risks, try an ETF. But, if you’d like to add a little spice into your investment choices, keep reading.
- Cheaper than mutual funds
- Trade during market hours
- Still limited choice
- Make less sense for long-term investing
Best for:experienced investors
I promised you spice, so here goes nothing. Once the mutual funds and ETFs of the world bore you, consider venturing into options. In the right circumstances, they can improve the overall return of a portfolio.
An option is a contract that lets you buy or sell before a specified date — literally, it gives you the option. You can purchase options for commodities, stocks, indexes, and more.
Contracts giving you the right to buy are call options; choose them if you expect the price to rise. On the contrary, put options give you the right to sell; use them when you expect the price to fall.
To help you predict price movement, you’ll need to learn how to use the “Greeks.”
No, you don’t need to consult the ancient wisdom of Socrates — in options trading, Greek symbols (Delta, Theta, Gamma, Vega, Rho, and more) are variables that represent the sensitivity of an option to various other factors.
The flexibility of options is an obvious advantage over the products I’ve already covered and great for managing risks. But make no mistake — options trading still carries risks, and the flexibility comes at a premium.
It usually takes some time to get your head around the concept of options. That’s why options are usually the territory of more experienced investors, but there’s no reason you can’t give them a go.
- Greater flexibility
- Use them to manage risks
- Allow greater capital efficiency
- Complicated to understand
- Pay a premium for the flexibility
New financial products
I may have made a slight dig at cryptocurrencies earlier, but I’m not totally against them. In fact, in the past, I’ve invested in Bitcoin myself.
Unfortunately, I’ve noticed a tendency for people to blindly invest in these virtual coins under the guise they’ll be the “next big thing” without a decent understanding of what they are or how they work.
I’d recommend checking out the free learning resources on Coinbase — which is also a crypto marketplace — to educate yourself.
Everyone was talking about Bitcoin; then its price fell from $20,000 in late 2017 to $3,000 at the end of 2018. As at the time of this update, Bitcoin has smashed through this and is currently at just under $25,000
However, there are lots of people who have made a killing on cryptocurrencies — usually the ones who bought the coins when they were almost worthless and sold them at their peak. Most of the winners saw potential in the technologies before they hit the mainstream.
On the bright side, despite the coverage, cryptocurrencies still haven’t hit the mainstream yet, there’s a high chance that some of them are still underpriced and will become very valuable in the future. The tricky part is figuring out which coins fall into that category.
- Potential for huge returns
- Good way to invest in blockchain technology
- Highly volatile and high risk
- Very volatile
- Need to have some understanding of blockchain to understand the cryptocurrencies
- Potentially, the price still has a long way to go.
In case the name didn’t give it away, P2P lenders loan their capital to “peers.” P2P marketplaces connect investors like you with people looking for loans.
Because you’re lending to your peers, the stock market doesn’t directly affect your returns. However, returns are affected indirectly: if your borrowers lose their jobs because of a recession, that’s bad news for you.
Many people are wary of P2P lending because of its relative newness; only the oldest companies have been through a financial crash. There’s no way of knowing if they’ll survive the upcoming recession.
Personally, I think peer-to-peer lending is a good way to diversify your portfolio and not hugely risky if you choose an established company.
However, I wouldn’t want to invest my entire 100k into it — especially since the returns are unlikely to be significant.
Unless you’re willing to invest in the riskiest borrowers, most platforms will give you a return of 7 to 9% — and then there’s the management fee of 1% to factor in.
- Not directly affected by stock market
- Some companies have a proven history
- Untested waters
- Returns may not warrant risks
This way, you can continue to buy and sell a contract without ever needing to hold the physical item.
Plus, because you commit to a price at the beginning, you can protect yourself from big losses — or speculate on future prices.
However, as you might be able to tell, futures contracts are complicated, volatile, and best suited to experienced investors.
- No need to hold physical goods
- Limits your losses
Best for:store of value
Gold: the darling child of doomsayers. Yet you’d be a fool to rule out the precious metal entirely: spot gold (the price at which gold sells on the spot) is the highest it’s ever been since 2012.
Not everyone agrees gold is intrinsically valuable, but humans have almost always valued it. It’s a safe haven investment and a store of value: during periods of uncertainty, its price rises rather than falls. Many investors also see silver as a safe haven investment.
Some people like to buy gold coins or bars, but watch out for the fees.
Don’t want to hold most of your wealth in the form of heavy and very conspicuous blocks of physical gold?
First, I don’t blame you. Second, you don’t have to. You can also hold the value in the form of gold stocks — I’ve outlined my best picks here.
Yet gold’s biggest strength is also its biggest downfall. Aside from market downturns, it rarely undergoes significant increases in value — over time, gold performs even more poorly than bonds.
- Store of value
- Does well during market crashes and uncertainty
Small returns over normal periods
Best for: consistent income stream
Real estate is often the first investment idea people think of. It’s easy to see why.
Some parts of the world have seen eye-watering increases in their property prices — in London, the average property price increased 625% between 1995 and 2020.
Although housing bubbles exist and can burst, demand is unlikely to go down to zero. Historically, house price growth in the US has always outpaced inflation.
There are a few ways you can invest in real estate, but the most popular is to become a landlord. For example, you could use the 100k to put down a large deposit on a condo or townhouse..
If you rented it out to others, you could pay the mortgage with the money from the tenants; after two decades at most, you’d own the house outright. Not bad!
The best part is, you can repeat the process as many times as you want. Obviously, before going into something like this you’d need to do your calculations.
Among other things, you’d need to make sure the expected rental income can cover the mortgage payments.
I’m oversimplifying things.
Renting out properties isn’t easy. You could end up with nightmare tenants who refuse to pay and you’ll have responsibility for anything that happens. Although you can outsource some of the work, being a landlord can be a serious time commitment. I know because I’m a landlord myself.
- Stability of prices
- Upscale your earnings over time
- Lots of responsibility
- Time commitment
Best for: Wine connoisseurs
I know what you’re thinking: wine? Really? Surely spending my 100k on drinking myself into a stupor on one big blow-out is exactly how I shouldn’t be investing my money?
Yes and no. As long as you don’t drink it yourself and you have a safe place to hide it from house guests, wine can be a brilliant investment.
The London International Vintners Exchange (Liv-ex) is a global wine marketplace and a great place to start your research.
Once you’ve identified a starting point, you could buy your wine from:
- Fine wine merchants
Wine is a risky investment, so I don’t recommend putting your entire 100k into it unless you’re an expert in the field. But it can be a worthwhile way of diversifying your portfolio for the right person.
- Interesting investment
- Requires research
- Storage of the wine
Best for: art enthusiasts
Investment in art and wines have a lot in common: they’re both unusual investment strategies that carry a lot of risks and require plenty of research. Plus, you need to be careful about how you store both of them.
It takes a certain type of person to successfully invest in art. But, if you’re knowledgeable about art and confident you can make good decisions about which art pieces will increase in value, go ahead.
Remember, art is one of the least liquid assets you could find. Sometimes it takes years to find the right buyer for a valuable piece. Because of the difficulty of connecting buyers and sellers together, middlemen charge an exorbitant fee.
- Interesting for art enthusiasts
- Difficult to do well
How can I invest 100k to make passive income?
The easiest way to make passive income is to put your 100k into an index fund and wait for compound interest to work its magic; eventually, the interest will be your passive income. Real estate investment can also be a great way to make passive income.
How to invest 100k to make 1 million?
Unfortunately, there’s no quick and easy answer to this one. If you stick your 100k into an ETF or a mutual fund for a few decades, you’ll eventually amass $1 million, but it requires patience. You might reach your goal quicker with other strategies, but they also carry more risk.
Should I invest 100k or pay off a mortgage?
It depends on your priorities. Many people would prefer to pay off their mortgage because of the financial stability it would give them — understandably, most people don’t like being in debt.
However, the opportunity cost of paying off your mortgage is not investing your money elsewhere.
It makes financial sense to invest your money elsewhere if you could make more money elsewhere than you’ll end up paying as interest toward your mortgage.
I’ve only scratched the surface here — I could write a book about every investment strategy on this list.
As you can see, the best ways to invest 100k vary between people. But whether you like the idea of investing in wine or you prefer to keep things simple with mutual funds, there’s no excuse to forgo investing altogether.