There are more ways to invest $1 million than you might think. It’s smart to have a plan in place and to assess your goals for growth and risk tolerance. Of course, you’ll also want to factor in how much time you have until your anticipated retirement date. To help you prepare, we spoke to four money experts. If you actually have the cash on hand – and it’s burning a hole in your brain – you may want to consult a financial advisor directly. SmartAsset’s matching tool can help.
Step 1: Identify What You Need the Money to Do
How to invest $1 million depends a great deal on your objectives. It’s a common mistake to invest “without first understanding the purpose for the money and your personal goals and circumstances,” says Lorraine Ell, CEO and senior financial advisor at Better Money Decisions in Midland, Michigan. “If the money is to fund retirement, then making the money last becomes important. If the money is to fund college for children or to buy a house, then liquidity is more important. Both situations call for different portfolios.”
Another scenario: say you want to use $100,000 of the $1 million a year from now. “Investing any of that $100,000 in stocks would be a gamble because the timeline of when you need that money is so short,” explains Robert P. Lawson, CPA, CFP, director of wealth advisors at Vector Wealth Management in Minneapolis. In that time-frame, “the volatility for stocks is too high for you to risk losing the money.”
Earmarking the money is important exactly because of that potential volatility. Whether you want the million “to create income, grow fast or maybe pass on to the next generation, knowing your goals and strategy will help you stay disciplined,” says Jason Labrum, CFP, AIF, founder and president of Intelligence Driven Advisers in Carlsbad, California. “When you have a plan and know how it fits into the big picture, you’re more likely to keep your head no matter the environment and emotions of the day.”
Step 2: Align the Plan With an Investment Strategy
This, of course, is what financial advisors do for a living: integrate a client’s financial goals (along with his or her tax situation, income needs, risk tolerance and more) with an asset allocation and then select investments and strategies to construct a portfolio.
Generally, though, you’re choosing between stocks and bonds. The former represents more risk and growth, while the latter represents lower return for less volatility. Experts can help you determine the right mix, but the rule of thumb is that the longer your time horizon, the more into equities you should be. This is because, as Ell puts it, “you have time in the future for your accounts to rebound from market declines.”
So if you don’t need to touch the $1 million for, say, 30 or more years, you “can be very aggressive and own a high percentage of stocks versus fixed income, even 100% stocks,” says Lawson.
If that feels too risky, someone with 30-plus years to grow his or her money before retirement could do a 70/30 or 80/20 equity-to-bond ratio, suggests Ell. For someone who is 45, she says that the standard ratio is 65/35 or 60/40 allocation. And for someone who is 65, it’s 50/50 or 40/60.
Alternately Labrum, who is the author of the book “Financial Detox” and host of a radio show with the same name, believes in solving for your target rate of return and generally suggests these ratios (equity to alternative assets to bonds) by age: 90-5-5 for someone who is 30, 80-8-12 for someone who is 45 and a range of 40 to 70 in stocks for someone who is 65 with 25 in alternatives and the rest in fixed income.
Step 3: Forget Trying to Time the Market
Especially as the Dow climbs to new peaks, it’s tempting to think that you’ll sit on the $1 million until prices come down. Trying to time the market is called tactical investing. But the problem with it is that “ it’s impossible to predict the future,” says Jim Shagawat, president and partner advisor at AdvicePeriod in Paramus, New Jersey. “There are really two paths of investing: active traders, who try to predict the future, and passive traders, who let the market do the work for them. Overwhelmingly, studies show that active traders get it wrong most of the time.”
Ell adds: “The difficulty with tactical investing is that you need to be right twice. You need to know when to get out and then when to get back in.” She has seen many people who sold in 2008 and 2009 and were still sitting it out in 2012. “They missed the rebound,” she says.
Step 4: Remember to Rebalance
Once you figure out your goals, determine your asset allocation, identify your investments and then buy them, you’ll probably think that you’re done – or want to be. But all the advisors we spoke to had the same final thought: remember to monitor your account periodically and rebalance when necessary.
For example, say your asset allocation is 60% stocks and 40% bonds, but after a post-market downturn, your allocation becomes 50% stocks and 50% bonds. To get back to 60/40, you would have to sell bonds and buy stocks. “Buying more stocks in the middle of a recession may make investors feel uncomfortable,” says Lawson, “but when done over time and through various market cycles, rebalancing the asset allocation is a critically important part of long-term investing.”
On the other hand, if a rising stock market moved your asset allocation to 70/30, you’d need to sell stocks and buy bonds to get back to your target ratio of 60/40.
Rebalancing is key “to taking advantage of the market ups and downs,” says Lawson, who notes that “the exact timing of rebalancing is part art and part science.”
Over time, leaving $1 million where you originally put it, or setting and forgetting it, as the saying goes, will leave your asset allocation out of whack. Instead, by rebalancing periodically, your portfolio will more likely have the risk that you intended – and the return that you’re counting on.
How you invest $1 million depends greatly on what your goals are for the money. Generally, the longer you don’t need to touch the money, the more you can invest in stocks, which are considered riskier than bonds. But once you put the money in the market, you need to keep monitoring it – and rebalancing your portfolio when your asset allocation tilts too much toward stocks or bonds.
Tips for New Investors
- Try exchange-traded funds (ETFs). These “baskets” of stocks are a good way to test the investing waters, as they trade like stocks but carry less risk, as they often track an index. What’s more, many investment companies that offer ETFs, like Vanguard and Fidelity, have cut their trading commissions, so you don’t have to pay a surcharge to buy or sell ETF shares.
- Don’t go it alone. Selecting investments and rebalancing your portfolio can be challenging. To start your search for a financial advisor, use SmartAsset’s five-minute pro matching tool. Simply answer questions about your financial situation and preferences, and the program will recommend up to three suitable advisors near you.