What would you do if someone handed you $100,000?
Do you think you know the best way to invest this money?
Americans have a unique challenge in life and have developed an adaptive skill that people from many other countries can barely even conceptualize. Although it’s a very real problem for we Americans, in many parts of the world they’d give almost anything to have this problem.
The problem: Too much choice.
The other day I spent 30 minutes looking around on Netflix for the movie that was an exact fit for my mood at that exact moment. We walk into our grocery stores and have to apply our well-honed, complex analytical skills to decide which cheese to purchase. Want cereal? Flakes or biscuit? Sweet or savory? Real sugar or HFCS? Should my eggs be cage-free or vegetarian fed? Both? But those are $6! Time to paint the living room? Choose from 10,000 unique shades of light brown! Whatever the choice of the moment might be, we in America spend a lot of our time wading through various buying choices and these choices are a reflection of our person and a projection of our aspirations.
I would flip through catalogs and wonder, “What kind of dining set defines me as a person?”
-Jack, Fight Club
If you’ve ever seen a recent immigrant shopping in an American supermarket, it can be fascinating. Often it’ll take them forever to make a decision as they carefully wade into this sea of decision-making. Those of us who have been running this gauntlet for some time now have built up resistance to the sensory overload that is a modern store. We can usually zip through using well-tread criteria and remain unscathed.
When it comes to deciding the best way to invest, it’s not always so easy
Since I recently sold my fourplex, I now have some investment funds to redeploy. After cleaning up some other financial loose ends, I’ll have about $100,000 to invest elsewhere. Getting to this point was easy compared to the next step of actually pulling the trigger. (Incidentally, the first step in getting organized in investing is to sign up for a free account with Personal Capital so you can get a handle on your current situation. You can learn more here.)
Like a freshly arrived Somalian’s first visit to a Seattle Safeway, I’ll admit to being somewhat overwhelmed by my options. So I turn to you, readers, to help me out. What’s your advice for someone with a chunk of change in his pocket?
I’ve been considering a few different options over the past few years I’ve been trying to sell the fourplex. Many of them I was completely ready to move on at various points but since I couldn’t access the funds, they never happened. Some of those ideas have been completely dismissed while others are still being considered.
A few of my favorites:
Is more real estate the best way to invest this money?
Real estate is like a drug, and I’m hopelessly addicted. I love how it’s in my control (mostly) and I love how it’s tangible. With my own effort, I can enhance a property to increase its value. During the depth of the real estate crash, I was licking my chops at some very underpriced single-family homes, particularly in the city of my birth, Vancouver, Wash. Check out the inventory! There are a ton of decent houses available for less than $200,000 right now. Using my funds and tapping our home’s HELOC fund, I could pay cash* for one of these babies. Hard to resist! Rents in that area are pretty low, at maybe $1,200/month for something pretty nice. I could basically earn a 5%+ yield (although surprises always await with real estate!) and potentially also get some additional gain from equity growth as the market improves in that area.
(Interesting side note about this area: A few months back I was looking at what kind of inventory was available and I noticed almost every listing’s status was “short sale pending”. Page after page of listings. Then I read about how companies like the Blackstone Group were buying in big to the single family housing market and renting the homes out. I’m pretty sure these big investment firms were single-handedly driving up the prices. If I could have sold my plex a couple years ago and pounced, I could have already made well over $100,000 down there.)
So if I get lucky, I could earn something close to what I could earn investing more traditionally PLUS there is the potential to hit another jackpot. If the economy got quite hot in the Portland-Vancouver area, a price increase of $50,000 to $100,000 isn’t out of the question. But if the economy was doing that well, a stock market investment could do quite well also.
On the other hand, if I get unlucky, just a few repairs could wipe out every year’s income. Or, even worse, I could get dragged into negativeland and would need to cough up cash to support the endeavor. Additionally, the sporadic, unreliable income is what made rentals so unappealing with my fourplex. If I’m only going to earn 5% or less, I’d better not have to take a bunch of annoying phone calls to get it.
If I went this route, I’d plan to hold for three years minimum, and hopefully five years maximum. Hmmm…
What about REITs?
Instead of buying real estate that I have to personally deal with, buying Real Estate Investment Trust funds might be the best way to invest this money. These funds let you be invested in real estate and as an investor with others instead of holding the bag all by your lonesome. I have a few REITs already but hadn’t bought in further because I was already so deep in real estate. I’m still considering this direction.
Why not just buy individual Dividend stocks?
If you read my post on Dividend Mapping, you know I’m somewhat entranced by dividend stock investing. Yes, like any investment it carries some risk and has its own share of pros and cons. My favorite things about dividend stocks are that they’ll continue paying as normal whether the price goes up or down. From an income standpoint, it’s a little more “controlled” in the sense that the dividends drip in like clockwork, helping me avoid some of the wild swings of real estate. That stability alone is worth something to me after dealing with the roller coaster of real estate income over the past decade.
I’ve done a bit of looking around at what individual stocks I could pick up, in a modified version of Dividend Mapping. Really it’s closer to creating my own mini mutual funds. I’m pretty happy with my selections so far. I found some stocks that I wouldn’t have otherwise noticed that I really like. So why not just buy in? Well, my track record of buying anything outside of a fund is atrocious. You know how it always rains after you wash your car? That’s how it is with me and stocks. I used to joke to my friends that they’d better sell because I was buying in, thereby guaranteeing a drop. Yes, it’s been that bad. So that eats at me when I consider pulling the trigger.
Could a good ol’ fashioned Vanguard fund be the best way to invest?
In what is probably the simplest approach, I could just buy into one or more Vanguard funds, such as the Total Stock Market Index (VTSMX). They are tried and true and in some ways this would be the lowest risk approach. They also have some managed payout funds that I haven’t really looked into yet. Probably the smartest thing to do from a traditional investing perspective would be the classic combination of total stock market, bonds, some international, etc. to provide the diversity needed down the line.
So on the plus side, there are solid, relatively safe investments available. On the negative side, I’ve felt like we’re overdue for a market correction and buying in now would almost guarantee it! If the market took a fairly big dip, that would certainly make my decision easier.
How about a combo platter?
Naturally combining several different approaches is often the best way to go. It gives you good solid diversity and also lets you catch a wave if a particular sector takes off. But what combination?
I could also dollar-cost-average my way in to some of these choices to protect myself from a sudden drop, but that entails leaving a big sum of money uninvested.
So how do I decide on the best way to invest this money?
I’ve (obviously) never been a very skillful investor. I did well investing in myself (education and career learning) and I got lucky more than once. My lack of confidence in market investing pushed me toward real estate and I was fortunate that my timing coincided with a low interest rate era that caused a big housing spike.
The interesting thing about my current conundrum is that had I received the same amount of money over a number of years, it would be much easier to decide where to put it. It’s the Power of the Chunk in action! Get a big chunk all at once, the stakes immediately seem much higher! Taking a big hit in the market would hurt much more after dropping in a big sum of money than it would before I was using it as income and when it was just a collection of smaller investments (if you follow me).
So here I am, looking at my various options, thinking about what to do next. I can tend to be an over-analyzer and the waiting carries its own danger as well. I’ll be sure to let you know what I decide!
What do you think? What is the best way to invest $100,000? What would you do if someone stopped by your house and handed you a check for $100,000?
Let me know your thoughts in the comments. And if anyone wants to write a guest post on this topic, send me a note through the contact form. I think it’d be great to have a few different voices weigh in on this topic.
*Paying cash isn’t my first choice, but last time I checked, the credit market was so tight that getting a loan was near impossible even though I wouldn’t be using my income from working to pay for it even if I had a job. It might be possible these days, but I haven’t looked into it.