Financial markets present a vast world of potential, but a substantial level of skill and knowledge is required to leverage it. Most of all, a serious amount of capital is needed to make serious gains from investments.
Let’s say you have $50,000 set aside to invest. This is no paltry sum, and it can really yield solid returns in the markets. However, it can also present a big risk if invested incorrectly. What’s more important than your potential yields is your potential risk.
Taking care of this risk is called risk management, and it’s the key to successfully investing in financial markets. Now, everyone may have their own goals when it comes to investing. Some may prefer more risk than others, and some may prefer lower returns and lower risk.
We’ll outline a general low-risk strategy that involves a diversified portfolio, exposure to multiple markets, maximized retirement benefits, and a solid plan for reliable growth.
The first step in investing is careful research and planning. Once we’ve laid out a list of investments, we’ll invest the entire sum at once into appropriate portions.
If your employer provides tax-deductible retirement investment accounts as benefits, we’ll also look at how those can be maximized in order to increase your take-home profits. Afterwards, we’ll look at how compounding and regular contributions can grow your money.
Finally, we’ll explore how investing can enable you to look beyond retirement and achieve any other sort of financial goals.
The most important aspect of risk management for the long-term investor is diversification. This means spreading your money across several assets and markets in order to mitigate the risks of individual assets.
In other words, if you invested $50,000 into a single stock and nothing else, you have the potential to take a serious loss. Additionally, if you invested only in the stock market, albeit through a diversified index fund, you could still take a loss from a bad year or market crash.
The rule of thumb is to subtract your age from 100 and use the difference to determine the percent allocation into equity or the stock market. The remainder, the total number of your age, is the percent to put into bonds. The reason for this rule is to decrease risk as you get older, accumulate more wealth, and approach retirement.
Stocks and bonds are inversely correlated. This means that the stock market does well when bonds give low yields, and bonds will do well if the stock market stalls or crashes. If you are invested in both, then one will counterbalance the other and keep your total assets safe.
Say an individual has $35,000 invested in a stock. This would be a 70% allocation into the equity market for someone who is 30 years of age. Subtracting 30 from 100 gives you 70% into stocks and 30%, or $15,000, into bonds. However, a beginner investor can diversify through funds.
A very simple way to invest in both markets is through a stock index fund like the Fidelity ZERO Large Cap Index (FNILX), the Vanguard S&P 500 ETF (VOO), or the SPDR S&P 500 ETF Trust (SPY). These funds offer a convenient way to invest in a wide range of the best companies available on the market. Index funds are a much safer and often more profitable way to invest.
Similarly, a way to get a piece of the bond market, or exposure, is through bond index funds. These include the Fidelity U.S. Bond Index Fund (FXNAX), the Vanguard Total Bond Market Index Fund (VBTLX), and the Fidelity Total Bond Fund (FTBFX0). If the stock market performs poorly, these will give good yields and protect your capital.
There are two ways to allocate a large sum of money into financial markets, dollar-cost averaging and lump-sum.
Dollar-cost averaging means investing the sum bit by bit in order to get a favorable average price over time. Lump-sum, as the name suggests, means investing the entire sum at once.
Dollar-cost averaging is great for retirement accounts, but lump-sum averaging is the best choice if you already have a large liquid sum like $50,000. This allows you to immediately get the maximum amount of return on your investment without having to wait over several periods.
If you do have a 401(k) account or similar retirement benefits from your employer, you are already doing dollar-cost averaging through regular funding with your monthly payments. This sum should allow you to make maximum matched deposits and grow equity.
If you do not have a 401(k), or you are already making maximum matched deposits, you can still make regular contributions to a Roth IRA in order to save for retirement while substantially reducing your tax burden.
While dollar-cost averaging may not be the best solution for a standalone investment account and $50,000 in liquid cash, it is a good idea to make regular contributions to your investments through your normal monthly income.
This both incentivizes savings and gives you the opportunity to make substantial compounded gains. For example, on average, the stock market or S&P 500 returns 10.5% per year.
This means, if compounded monthly, a $50,000 initial investment with regular $2,000 contributions each month would yield $246,939 in 5 years, $587,432 in 10 years, and $2,193,896 in 20 years.
The beauty of compounding is that your returns grow proportionally to the amount that you reinvest, and the amount that you reinvest are your returns. That means your money undergoes exponential growth, within the limits of the market.
As you can see, even conservative fund investing can yield massive returns through compounding, financial discipline, and patience. You may be thinking, these sorts of returns are far more than enough for retirement.
You’re right, a seven-figure investment account or larger sum is more than the average person needs for retirement. Investing allows you to expand your horizons when it comes to financial possibilities.
Some additional financial goals could include, purchasing property in cash, building an educational fund for your family, starting a business, making a large purchase, or financing a charitable community project.
With the right insight, discipline, and patience, a $50,000 sum is more than enough to accomplish any sort of financial goal you have.