If you came into an extra $40,000, how would you use it? It might be tempting to put that money into something instantly gratifying, like a vacation. But for some, it may be wiser to use those funds to invest in your future. In a few situations, that might mean paying down debt first. Or it might mean stockpiling several thousand for a rainy day. But using a portion for investing after you take care of those basic necessities can open up several financial opportunities. When deciding how to invest $40,000, consider working with a financial advisor.
The Stock Market
When you invest in the stock market, your gains or losses depend on the performance of the company and stock you choose. Because of this, your gains may vary vastly. The stock market is subject to volatility, meaning you can earn high returns one day and end with a loss the next.
But there are dozens of ways to invest in stocks and each way works best with different strategies. For example, you may be interested in index funds, which track benchmark indices like the S&P 500. The S&P 500 acts as a benchmark for the overall U.S. stock market. Although it slightly outperformed the average U.S. stock market return the past 10 years with an average return of 13.6%, according to Goldman Sachs.
You don’t need a stockbroker these days, though. There are several online brokerages that offer low management fees, sophisticated tools, and educational resources for both novice and experienced traders alike.
Bonds
Bonds are a form of debt instruments. Essentially, the investor acts as a lender to an entity, such as a company or government. In return for the bond’s value at maturity and regular interest payments, the investor lends said entity money.
Bonds come in a couple of varieties, though, such as:
Treasury securities are the least risky option, and corporate bonds are the riskiest. That’s because corporate bonds don’t receive any backing from a local, state, or Federal government. Because of that, you can also guess that your greatest rate of return is likely with a corporate bond. Higher risk means you may see an increased rate of return.
Generally, though, bonds are lower risk compared to options like stocks.
Mutual Funds
Mutual funds take money from several investors and pool it together to make investments. This investment vehicle holds multiple securities, including stocks, bonds, and other sub-asset classes. You may already be investing in a mutual fund if you have a 401(k), even, since they are a common choice for the retirement plan.
Mutual funds offer investors a simple and inexpensive method way to get diversification. However, they can be slightly more costly than index funds. That’s because many mutual funds come with active fund managers. This manager makes regular trading decisions with the intention to outperform the market, not match it.
High-Yield Savings Accounts
When people think of “investing,” they often associate it with extreme growth. But not every investment is designed to triple in value. In many cases, you may just want a risk-free way to build a little interest on your funds.
A high-yield savings account offers you just that. It’s a savings account with a higher interest rate than you would find with a traditional brick and mortar bank. While you may not make much, it can be a great way to protect your money for the time being. So, your funds are safe until you figure out an investment that suits you.
Alternatively, a high-yield savings account can also be a good location for an emergency fund. You don’t need to pull all $40,000 away for that. Typically, experts recommend an emergency fund amount to approximately three to six months’ worth of expenses.
CDs
CDs, or certificates of deposit, are savings vehicles insured by the Federal Deposit Insurance Corporation (FDIC). They generally have a set timeframe in place, which can be anywhere from six months to a year or more. You deposit your money into the CD for the predetermined period and receive a guaranteed return. But, unlike a high-yield savings account, you can’t touch it. There are usually early withdrawal penalties.
CDs work best when you know you will need a fixed amount of funds for a future date. The most common lengths are 1-, 3-, and 5-year terms, so avoid this option if you want to grow and use your funds quickly. The
Some investors ladder the maturities of CDs. With this strategy, you divide your investment into several CDs of varying term lengths. That way, you can take advantage of long-term CDs’ higher rates without putting all your funds into that CD.
Real Estate
While $40,000 can start you toward significant earnings, it likely won’t be enough to purchase property outright. However, there are still several ways you can use it to start investing in real estate. For some, $40,000 can be a sizable portion of your down payment. Or, if you don’t want to handle a physical property, you can invest in REITs. REITs, or real estate investment trusts, are typically publicly traded, similar to stocks, and include spaces like office buildings, residential properties, retail spaces, mortgages, or a combination. Some ETFs and mutual funds also offer ways to invest in REITs.
You can also consider real estate crowdfunding as an alternative to REITs. With this, you join other investors and put your cash into equity shares of a particular property. Thus, giving you access to a share of cash flow generated by renting out the property or from appreciation when the property sells.
Exchange-Traded Funds (ETFs)
Exchange-traded funds, or ETFs, are similar to mutual funds since they track market indices; however, they trade like stocks. ETFs come with several advantages, especially for novices. You achieve more diversity than buying individual stocks and possibly minimize your losses if you choose an ETF tracking a broad index.
A number of ETFs are index funds and carry low management expense ratios (MER). That is an annual fee expressed as a percentage of the fund’s investment, and it covers various operational costs, like management, marketing, administration, record-keeping, and shareholder services.
ETFs work well for investors with long time horizons but want something lower cost than a mutual fund. That’s because they generally come with share prices lower than a mutual fund’s minimum investment requirements.
How to Determine the Best Way to Invest $40,000
Investing is not meant to be one-size-fits-all. You may have people in your life, like colleagues or neighbors, ready to tell you how to spend your money. But your specific situation should determine where your $40,000 goes – not the advice of amateur investors. You can narrow down the best strategy for yourself by taking these concepts into consideration.
Time Horizon
Your time horizon is your timeline; how long you plan to hold on to your investment. Depending on your answer, you may have to adjust your investing strategy.
Usually, an investor with a short time horizon should consider avoiding high-risk or aggressive investing strategies. Even if your goal is within a few years, you may still want to consider less-volatile options. For instance, stocks, or equities, can face drastic price fluctuations, leading to loss. If your time horizon is short, you don’t have enough time to financially recover if your stock investment declines.
As a result, it may be wise to choose lower-risk investments with a short time horizon.
In contrast, someone investing their $40,000 to boost their retirement funds might have a long time horizon. The wider the gap between your current age and intended retirement age, the longer your time horizon.
Long-Term Financial Goals
Figuring out your goal is the crux of any investment – your starting point. If you have $40,000, you need to find out what you want to use it for before putting it anywhere.
For instance, do you just want to preserve the value of that fund? You may want it to build enough interest to avoid loss due to inflation. That way, you have a viable fund you can dip into as an emergency fund or for costs like utility bills, groceries.
Or maybe you have bigger goals. $40,000 may be your first step toward a down payment on an apartment or a home renovation.
Like this, narrowing down your goal can help you decide how to invest the money. A larger goal may require more significant risk and rates of return. Smaller goals
Risk Tolerance
Risk tolerance is essentially how much loss you can afford. No one wants to lose $40,000. But if you can stomach it without financial consequence, you probably have a very high risk tolerance.
For others, losing that $40,000 may be the difference between making next month’s bills or not. In that case, you may need a more conservative or passive investment strategy due to your lower risk tolerance.
A couple of factors may influence your risk tolerance, like your age, family status, and job. An older individual may want a lower-risk investing strategy so that they don’t jeopardize their retirement fund. In contrast, a younger person has more time to recover from potential drops in the stock market, allowing them to explore riskier options.
Bottom Line
Ultimately, you need to find balance. When deciding how to invest $40k, you have plenty of options that could yield significant growth. But you may have to compromise how quickly and how much your funds grow for the sake of financial security. In addition, your investment goals or strategy may change as time goes on. If you need to revise your portfolio, consider speaking with a financial advisor. They can help you choose more conservative options as you age or readjust your asset allocation to fit changes in your life, such as children or marriage.
Tips on Investing
Every investor is unique. Creating the best strategy depends on who you are as an investor. If you need direction, try speaking with a financial advisor. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Most investors should think about ways to prevent loss – a diversified portfolio is one of the most common methods. By finding the right mix of assets to invest in, you also gain more opportunities for return. Consider using our asset allocation calculator to help you find the best balance of investments for your $40,000.
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Source: https://finance.yahoo.com/news/invest-40-000-7-smart-211750067.html