Whether you came into an exciting windfall or spent years working and saving to build a nest egg, it can be hard to figure out what to do with all that money once you become a millionaire.
Your investment objectives should be two-fold:
1.Maximize returns
2.Protecting your capital
So, how do you invest a million dollars to maximize returns while ensuring the money will be there when you need it?
Stocks and Bonds
According to most financial experts, the best way to invest a million dollars is in diversified low-cost index funds with a mix of stock and bond ETFs.
However, the actual mix of stocks vs. bonds you should hold depends on your risk tolerance and financial goals.
Stocks have historically generated higher returns but come with increased risk, whereas bonds have lower volatility and lower returns. A classic stock/bond portfolio has reserves to drive returns over the long term, while the bonds provide stability and cash flow over the short period.
How to Determine Risk Tolerance
A significant factor in determining risk tolerance is your age.
If you’re in your late thirties or early forties, you can weather a few bad years and wait for your 100% stock portfolio to recover over the decades.
But If you’re in your fifties or sixties, you’re probably trying to figure out how to invest a million dollars and live off the interest when you retire in the next few years.
Planning out the Best Way to Invest $1,000,000
Similar to your risk tolerance, your financial goals play a role in determining the best way to invest a million dollars.
If the maximum return is what you want, you’ll need a more aggressive portfolio. If your primary goal is capital preservation, you’ll want to take a safer approach.
Below, the best options for both types of investors.
How to Invest a Million Dollars:
1. High-End Art (Masterworks)
Risk level: Medium-High
How much to invest: $50,000
Experts say high-end art may be one of the best investments in 2023.
Investors have a lot on their plates in 2023.
Inflationary pressures. Cryptocurrency turbulence. Bank failures.
And now, finding promising investments is more complicated than ever.
Recently, Bloomberg asked investment experts where they’d personally invest $1,000,000 right now. And they overwhelmingly favored alternative investments like art.
After all, the ultra-wealthy have placed their bets on art for centuries. From the Rockefellers to Bezos and Gates — all actively collect art.
These numbers explain why:
Contemporary art prices have appreciated 14% annually (1995-2021).
Wealthy collectors allocate 10–30% of their portfolios to art.
Lowest correlation to public equities of any significant asset class, according to Citi.
Thanks to the first and only art investing platform, Masterworks, you can invest in art without needing millions.
By securitizing iconic works by artists like Warhol, Banksy, and Basquiat, everyone can be a bona fide art investor.
2. Max out 401(k) while reducing fees
Risk level: Varies with asset allocation
How much to invest: $22,500 maximum per year
If you’re American, one of the best things you can do is max out your 401(k).
Employers offer a 401(k)-retirement account as an employee benefit. Most countries have similar programs (e.g., RRSPs in Canada or SSIP in the UK).
Traditional 401(k)s let you invest some of your earnings from each paycheck, deducting the amount you contribute from your income for tax purposes.
This lets you take what you would have paid in taxes and invest it for your retirement instead.
To simplify things, imagine you make $1,000 each paycheck and pay 25% in taxes.
A typical check would see $750 going to you and $250 to the government.
If you decide to put $200 in your 401(k), your paycheck would become $800, and you’d pay $200 in taxes instead. So investing $200 would only cost you $150 in take-home pay.
3. Index Funds & Bonds
Risk level: Varies with asset allocation
How much to invest: No limit
Index funds aim to let investors track a market index, like the S&P 500, rather than using active management to try to beat the market. This passive management allows index funds to keep fees low while retaining solid returns.
For example, the SPDR S&P 500 index fund has returned 9.53% annually (since its inception in 1993).
Investing in index funds is all about matching your asset allocation to your risk tolerance. Stocks are higher risk but offer higher returns. Bonds are lower risk but have lower returns.
The more risk you’re willing to accept, the more of your portfolio you can allocate to stocks.
A 90/10 stock-to-bond split is aggressive and risky, while a 60/40 split is better for someone who is more risk-averse.
4. High-Yield Savings account
Risk level: Deficient
How much to invest: $250,000 maximum per account
A high-yield savings account is the safest place to keep your hard-earned money. But that safety means lower returns.
Given current rates and inflation, money in a savings account will lose purchasing power. If your bank pays 3% interest and inflation is 5%, you lose 2% of your purchasing power ($20,000 if you put $1 million in the account) each year.
If you put cash in a savings account, choose the one with the highest yield. I recommend CIT Bank.
Many choose big banks with lower rates, meaning they’re missing out on vast amounts of interest. The Wall Street Journal found that this amounts to billions in lost interest yearly.
5. Real Estate
Risk level: High
How much to invest: No limit
If you want to know what to do with a million dollars and don’t mind taking on some risk and putting in some legwork, real estate has three significant advantages over investing in stocks.
1.The two asset classes offered similar overall returns between 1870 and 2015. However, real estate was less volatile than stocks.
2.Real estate can be a cash flow positive asset, assuming the rents you collect can cover the mortgage and maintenance costs.
3.Real estate lets you use leverage. You can borrow money to buy real estate, allowing you to gain control over more valuable assets, then use those assets to pay off the loans you used to buy them.
That is something that you typically can’t do with stocks.
For example, if you decide to make a 20% down payment on any property you buy, having $1 million available to invest means you could purchase real estate worth as much as $5 million.
A real estate portfolio worth $5 million could produce much greater returns than $1 million stock or bond portfolios.
If you want a hands-off way to invest in real estate without the option to use leverage, you could consider supporting through Fundraise
This service offers real estate crowdfunding, letting you get involved in higher-cost investments like significant office buildings.
Final Word: How to Invest $1 Million
If you’ve saved $1 million, you’ve likely done so through years or decades of hard work.
You want to keep your nest egg growing while making sure you don’t put it at risk. For most people, the best way to invest $1,000,000 will be to:
1.Pay off high-interest debt.
2.Max out your retirement accounts.
3.Put at least six living expenses in a high-yield savings account as an emergency fund.
4.Invest the rest in a portfolio of index funds with an asset allocation that matches your risk tolerance.
While there are other options, each with pros and cons, this strategy will work for the vast majority of investors and help you grow your savings over time.
