How to Invest $200,000 (and generate a solid return)

Investing $200,000 is actually an important threshold.

It’s the dividing line between small investors and large ones. And like all investment amounts, knowing how to invest $200,000 requires unique strategies.

$200,000 is a large enough amount of money to fully diversify, and even take some speculative chances. It’s also a large enough nest egg that it needs to be properly protected.

If you want to maximize the success of an investment of this size, you need a goal and the strategy and tools to see it through.

How to Invest Your Money

A well-balanced portfolio requires a solid allocation between stocks, bonds, and cash. The stocks represent growth, bonds are for capital preservation, and cash provides liquidity. 

In today’s very low-interest rate environment, the common standard for portfolio allocation has become 125 minus your age.

So if you are 35 years old, 90% of your money should be invested in stocks. If you’re 65, then 60% of your money should be in stocks. Feel free to adjust the percentages to fit your own preferences and investment risk tolerance. Without further ado, here’s how I would invest $200,000.

Invest in CDs and Money Market Accounts

Cash has become a bad word in the investment universe, largely because it pays very little interest. For that reason, it’s generally recommended that you have as little cash in your portfolio as possible. But that doesn’t mean cash doesn’t serve an important purpose. 

For starters, you should have enough cash to cover between three months and six months of living expenses, safely sitting in an emergency fund. This will cover emergencies, but also keep you from having to raid your investment portfolio to pay for short-term needs.

The second major purpose is having some investment cash held on the sidelines ready to be invested in new opportunities. With a portfolio of $200,000, you probably don’t want to have any more than 5% of your money sitting in your investment cash position.

With both your emergency fund and your investment cash, you want to emphasize the safety of principal and liquidity. For an emergency fund, certificates of deposit (CDs) and money market funds will get the job done.

With investment cash, brokers usually offer some type of “sweep account” where excess cash is held in a money market fund. The problem with both bank assets and money market funds is that they don’t pay much in the way of interest – generally something like 0.25% or less. But once again, liquidity is your primary goal with both accounts, and not necessarily return on investment.

Invest with an Online Bank

One way to get a higher yield on your emergency fund is to open a high-yield savings account with an online bank.

Because these banks are online, meaning they have far fewer positions to staff and branches to manage, they can offer higher rewards to customers.

In fact, the interest you can earn on an online savings account blows away the best interest rates offered by traditional banks with similar accounts.

And the best online savings accounts come with benefits like ATM withdrawals, bonus rates, mobile check deposits, and little to no minimum balances or fees.

Ally Bank is an online bank that is currently offering 2.05% APY on savings accounts (on all account balances).

You can stash your emergency fund here, but an online savings account can also provide a profitable and safe-keeping place for your funds while you decide where to invest them later.

Invest in Bonds and Other Fixed Income Investments

Most investors know more about investing in stocks than they do about bonds. In fact, it’s pretty rare to see individual investors investing in bonds, unless they invest through a managed investment strategy.

Investment managers typically include a bond allocation with every portfolio that they design and manage. If 80% of your portfolio is invested in stocks, and 10% is held in cash (emergency fund + investment cash), you’ll have 10% left over to invest in bonds.

If you’re interested in investing in bonds as a do-it-yourself investor, or you just want some information as to what’s involved, you need to understand what types of bonds are out there.

• US Treasury Bonds: Most popular with institutional investors thes bonds are like pension funds. The 30-year US Treasury Bond has a current yield of 2.99% APY. Treasury bonds can be purchased through a broker or a bank, but you can also buy them commission-free and also hold them at Treasury Direct.
• TIPS: Treasury Inflation Protected Securities, commonly known as TIPS, have a much lower interest rate than similar term Treasuries, even with inflation adjustments. I hesitate to recommend these. Also, while the inflation adjustment is credited to you annually, you don’t receive it until you redeem the bond on maturity but you’re paying tax on it.
• Municipal bonds. These bonds have comparable yields to Treasury bonds, but they also are tax exempt for federal income tax, and for income taxes in the state that issues the bonds. If you have a combined federal and state marginal income tax bracket of 40%, then a 3% yield on municipal bonds will provide an equivalent return of 5% on a taxable investment.You can purchase them through brokers.
• Corporate bonds. These are bonds issued by corporations, and they typically come in denominations of $1,000. Yields on corporate bonds vary tremendously since each company has a different risk rating from the rating agencies such as Standard & Poor’s, Moody’s and Fitch.*

• Bond funds. For most investors who aren’t familiar with bond investing, the best way to invest is through bond funds. Each fund is a portfolio of various bonds within a certain category, like government, municipal, government, or corporate bonds. You can also invest in bond funds that have a certain maturity, such as one, five, or 10 years. These funds are also typically included in professionally managed portfolios.

*A 20 year “AAA” rated bond may have a yield of 3.63% APY, while a 20 year “A” rated bond may have a yield of 4.01% APY. The reason for the different yields is that the “A” rated bond is considered riskier, and requires a higher interest rate.

Bonds with ratings below “A” are usually not recommended, due to the higher risk of default, even though the rates can be a lot higher.

There is also interest rate risk, and that should never be ignored. Bonds with terms of 20 years or more behave much like stocks, but their price swings are determined by interest rates. And that includes US Treasury bonds. Rising rates mean falling bond prices!

But if you decide that you want to sell before they do, you can realize a loss on the sale. This is another major reason why individual investors tend to avoid bonds. They’re especially risky in this rate environment, where rates are so low that they have nowhere to go but up.

Invest in Stocks and Other Equity Investments

Stocks need to be the primary investment in your portfolio, not only because historically they provide the best rate of return, but more because they’re the primary source of investment growth.

Since 1928, stocks have returned an average of about 11% per year, which is well above other investments. All portfolios need to grow, not just to make you wealthier, but also to outrun inflation.

A 3% annual inflation rate, which has been about the average over the past 30 to 40 years, is the minimum rate of return that you need to earn in your portfolio – and that’s just to stay even.

It’s obvious that with interest rates being as low as they are today, you can’t do that with bonds and cash equivalents. And that’s why stocks are a necessary part of a portfolio, even if you’re completely terrified of the risk that they involve.

Index funds are the best way for most people to invest in stocks since the funds are professionally managed. And since they are invested in an index, like the S&P 500, they involve very little investment expense. They also typically are no-load funds and require only a small commission to buy or sell them.

But if you have at least $200,000, you’re in a position to speculate on individual stocks. too. For example, you might keep most of your stock holdings in index funds, and a smaller amount in individual stocks. This will enable you to actively invest in stocks, while also minimizing the risks that come with it.

One problem with trading individual stocks is fees. Even if you have low commissions – say $7 per trade – you’re looking at $14 per position. If you invest $1,000 in one stock, the commissions will eat up 1.4% of the value.

If you’re an active trader, that can add up to a big reduction in your return on investment over a full year. That’s why so many investors prefer to invest in stocks primarily through funds or ETF’s.

 Let’s say that you’re 45 years old, in which case 80% of your portfolio (125 – 45) should be invested in stocks – this is what will your portfolio would look like overall:

• Cash, 5% to 10%
• Bonds, 10% to 15%
• Stocks, 80%, of which 64% (80% of 80%) is in index funds and 16% (20% of 80%) in individual stocks

That’s just a general portfolio allocation; you can set the allocations anyway that you like, based on your own personal circumstances.

Invest in Peer-to-Peer Lending

P2P lending is an innovative investment idea that allows you to loan money to borrowers in need for projects that interest you, a concept that comes with high risk and high rewards.

P2P lending platforms fall somewhere between cash equivalents and actual investments. They pay a much higher rate of interest than traditional fixed-income investments, ranging between mid-single digits and low double digits, but also involve risk of loss.

You don’t want to get carried away with a P2P investment since they are not particularly liquid and there is some risk of loss of principal. However, having a small percentage of your cash position in a P2P investment can dramatically increase your overall cash yield.

If you have a portfolio of at least $200,000, you’re in a position to take advantage of that kind of opportunity.

You can see my guide to P2P lending and top platforms here.

Try Real Estate Investing with Fundrise

Fundrise is one of my favorite P2P lending platforms, but with a twist. Fundrise allows you to invest in real estate. Fundrise opened in 2012, and while they are not the oldest, they already have over 140,000 investors with over $1.2 billion assets managed.

Real estate investing is an appealing idea, but some people are hesitant to invest because they don’t want to manage the properties. If you’re one of those people, allow me to introduce you to REITs. A REIT is an investment trust, meaning there are no landlord duties involved.

With Fundrise, you get a company that specializes in investing in midsize real estate investments, all larger than single homes. While they aren’t buying homes and flipping them for a profit, their investments are smaller than large $100 million office buildings.

According to their website, Fundrise invests in buildings in the low millions. They are less competitive than the bigger real estate investments, which means you get better profits.

Based on the numbers on their site, in 2016, they had an average annual return of 8.76%, and that’s the lowest in the past several years.

One of the key features of Fundrise is that you can start investing with just $500. Their minimum investment is drastically smaller than the other REITs out there. If you want to dip your feet in the real estate game, Fundrise is an excellent way to do it. Real estate investing is fun, highly rewarding, and accessible to beginning investors, especially with a platform like Fundrise. 

Visit Fundrise >>

Where to Invest Your Money

One of the most important investment decisions you will make is where to hold your money. While your emergency fund can be held at a bank, and some bonds can be held through Treasury Direct, you need an investment broker.

Invest with a Discount Broker

These are brokerage firms that are specifically designed to benefit self-directed investors. They offer very low trading commissions, and while they usually offer investment assistance, the entire platform is tailored to do-it-yourself investing.

They offer the widest investment selection, including stocks, bonds, and options, but also mutual funds and exchange-traded funds. In that way, some of your money can be invested in professionally managed funds, while you also trade individual securities.

Discount brokers that we’ve reviewed here at Good Financial Cents, and that I feel comfortable recommending, include:

• TD Ameritrade
• E*TRADE
• Ally Invest

Invest with a Full-Service Broker

Full-service brokers typically offer all of the investment options that you can find with discount brokers. But the main difference between the two is that full-service brokers actually manage your portfolio for you.

They do this through standard managed accounts, and also custom-designed portfolios. They handle all of the investing activity for you, however they cost more than discount brokers.

It’s common to pay more than 1% per year in order to manage your portfolio.

Popular full-service brokers include:

• Edward Jones
• Raymond James
• Ameriprise Financial

Invest with a Robo-Advisor

Robo-advisors are something of a hybrid between discount and full-service brokers. They offer managed investment portfolios like full-service brokers but do it at discount cost levels.

For example, Betterment and Wealthsimple provide full portfolio management at an annual fee of just 0.25% of your account value.

Robo-advisors can be the perfect investment management platform if you have no interest or experience investing on your own.

Robo-advisors that we’ve reviewed here at Good Financial Cents, and that I feel comfortable recommending include:

• Betterment
• Personal Capital
• Wealthsimple

Other Investment Considerations

If you have $200,000 to invest, then you have a lot to lose. And that means that you will need to build some protection around your investment portfolio.

Think of the following recommendations as something like investment insurance. They’ll secure your investment portfolio, and ensure it will be available to pass onto your heirs.

Consider Purchasing Annuities

Depending on your retirement goals and where you are in your financial journey, then an annuity could make a lot of sense for a portion of your $200,000.

Annuities can offer principal protection, a fixed interest rate or a guaranteed income benefit that will pay for the rest of you and your spouse’s life.

There are several different types of annuities so make sure to do your homework first before making this purchase.

Protect Yourself with Insurance

One of the most basic purposes of all types of insurance is to protect your assets. In the event you are involved in some sort of disaster, insurance will protect your assets from creditors and litigation. That’s because the insurance proceeds will pay the claims, rather than you having to fork over money from savings.

If you have something like $200,000, you have a lot of assets to protect. For that reason, you want to make sure you always maintain adequate auto, health, homeowners and business liability insurance.

If you have accumulated $200,000, then you are most likely a high-income earner, meaning you should maintain plenty of life insurance.

You may need something to the order of a $1 million life insurance policy, which can be a lot less expensive than you think.

At a minimum, it will be there to pay uncovered medical expenses, estate taxes, and other taxes, and to pay off any debts that you have at the time of your death. That will protect your $200,000 nest egg for the benefit of your family.

Pay Off Debt

One of the benefits of having a large amount of money should be to reduce stress in your life. One of the very best ways to do this is to live debt free.

Not only will that make for a less complicated life, and give you more control over your cash flow, but it can also be an investment win.

For example:

Save for Retirement

Even with a $200,000 portfolio, you should still make sure that your retirement is fully covered. As much as $200,000 might be earlier in life, it generally won’t be enough to provide a comfortable retirement.

Plan to fully fund your employer-sponsored retirement plan, or at least up to the minimum funding necessary to get the maximum employer matching contribution. If you aren’t covered by an employer plan, or you want to save even more money for retirement, consider opening an IRA. Better yet, consider a Roth IRA.

You won’t get a tax deduction for contributions, but any distributions you receive from the plan can be taken tax-free, as long as you are at least 59 ½ years old, and have been in the plan for a minimum of five years.

That will be especially important if you have a large income generating portfolio in retirement. It means that at least some of your investment income will be tax-free. If you have any existing retirement account balances, or if you don’t qualify to make Roth IRA contributions, consider doing a Roth IRA conversion.

That’s where you can take money from other retirement plans, pay the taxes on the distribution, and then roll the money into a Roth IRA. Once there, the distributions can be taken tax-free in retirement.

Start Your Estate Planning

A half-million-dollar portfolio is where you’re getting to the point where there can be state-level estate taxes and family fights over the inheritance. One of the best ways to prevent these is through estate planning.

That will make sure that your money will go to who you want it to, and in the amounts that you decide. It will also enable you to provide for any beneficiaries you choose, particularly in regard to your children or grandchildren.

For example, estate planning could involve setting up a trust fund for your beneficiaries upon your death, that can provide them with an income for life. That’s something that a will can’t do.

When you reach the point of having $200,000 or more, estate planning comes into the picture. That’s when it’s time to make an appointment to sit down with a lawyer, financial planner or CPA who specializes in estate planning.

It’s virtually the only way to ensure that your final wishes will be honored, and your life’s savings won’t be squandered in a postmortem free-for-all!

Bottom Line

So, there you have it – how to invest $200,000. It’s probably more than you bargained for, but then again, $200,000 is more than most people have.

With the right strategies in place, that amount can grow tremendously. The key is knowing where and how to invest.

Invest your $200,000 well, and it will grow and take care of you for the rest of your life.