You should be proud of yourself for getting to this point. You’ve been disciplined and you’ve sacrificed a lot.
Once you’ve reached six-figures in savings, you have the ability to do a lot with this money.
You may begin to think about all the possibilities.
- Should I start a business…
- Should I take time off…
- Should I take my family on a nice vacation…
- Should I invest this money…
I’d like to break down how you could invest $100k and turn it into $1 million.
$100k to $1 Million – Investment Objective & Time Horizon
First off, it is necessary to define your investment objective.
What are you trying to achieve with your $100k investment? The goal may be to generate income or grow the principal as much as possible. These are two distinct objectives that require different investment strategies.
Timing is half the battle with anything in life. Ask yourself, when will I need the money? Set a date to accomplish your goal of investing $100k and turning it into $1 million.
Again, this goal will dictate how your funds are invested.
When it comes to setting these goals with different types of investments, consider the following:
- Cash is short term in nature. This means if you need the money between now and the next two years, your best bet will be to stay in cash. You want to have the money available when you need it.
- Bonds can be short, medium or long term investments but I usually group them in a medium term bucket. I consider a medium term time horizon to be 3 to 7 years.
- Stocks are meant for the long term. This means having a goal of ten plus years until you need the money.
- To help manage the goals you set, you can blend all three asset classes together to diversify the portfolio. Diversification can make the portfolio less volatile which can in turn remove some of the risk.
Investing in Publicly Traded Markets vs. Closely Held Businesses
When I talk about investing, I’m usually talking about investing in publicly traded companies or debt instruments. These are highly liquid, low-cost, and extremely diversified. If you need cash, we can sell something in the portfolio and have it within one to two days. Other investments may not be as easy to liquidate if you need cash.
As an alternative, you can start a business or invest in someone else’s business. The risk profile is ramped up significantly in this scenario: your money is completely concentrated in a single asset.
Risk and reward have a symbiotic relationship. When you take on more risk, you expect a higher return. At the same time, more risk could mean a higher chance for loss.
I mention this because these are two very different approaches to investing. One is more hands off while the other is more hands on. You theoretically may have more control over owning a business but it can be exponentially more difficult to succeed. That said, once you find success the rewards can be astronomical and you can easily achieve your goal of taking 100k and turning it into $1 million.
The most important question to ask yourself is: Which path is right for me? One is not necessarily better than the other but recognize what you’re getting yourself into.
Lump-Sum Investing and Dollar Cost Averaging: How To Make $1 Million Dollars
If you have $100k, you could invest it all at once and let the market do it’s thing. If you get an 8% annualized rate of return, it would take roughly 29 years to turn the $100k into $1 million. A 9% annualized rate of return would take about 26 years to get the $100k to $1 million and a 10% return would require about 24 years.
That’s not too bad if you have the money and don’t plan on needing it until retirement age. If you invested that money for 30 years at a 10% return, you would have $1.75 million. As the portfolio gets bigger, the compounding interest becomes much more material in value.
If you invest the $100k and save $6k per year for 30 years at a 10% return, you will make $1 million dollars more for a total of $2.83 million. This example shows the power of compounding; a little can go a long way. This is also called dollar cost averaging which is when you invest a fixed dollar amount over time.
If you don’t need it immediately, I would recommend investing the $100k as soon as possible. Research has shown the sooner you invest, the better your odds are for success. Missing a few of the best performing days can negatively impact your overall portfolio return.
You have a few options if you choose to invest the $100k:
If you’re interested in investing in a business, you may want to look into an already established company with a good track record and management. If you invest in a start-up it will be a difficult road unless you’re directly involved and have other resources available to you.
You can also start your own business but be sure to manage your budget and cash flow. It is not uncommon for a business to take at least five years to become profitable. You will also likely need to invest a lot more money than you initially intended.
Manage your investment expectations by educating yourself.
There are many ways to make money. Ask yourself what you would like to pursue and make sure your investment strategy aligns with these goals.
Investing in companies has proven to be one of the best ways to build wealth over time. I know many successful business owners who have accomplished amazing things. This comes at a cost though. Failure is a very real outcome and the degree of it can vary depending on how much you choose to risk.
When looking for investment advice, make sure you have good people in your corner. This will help you get an outsider’s perspective while feeling comfortable and at ease.
At the end of the day, if you’re happy with where you are in your career and the cash you’ve accumulated, investing in a diversified portfolio is a sound decision.