$5 million may seem like an impossibly large amount, but if you’re not careful, it could run out faster than you might think. However, through some simple investment strategies, you can make $5 million last a very long time. In fact, it will probably last long enough to retire and enjoy life with your family and friends, no matter how old you are now. All it takes is a little patience and know-how and your $5 million can keep you going for a long time. For help managing your $5 million, consider: working with a financial advisor.
Build a balanced portfolio
The most important part of investing, no matter how much money you have, is to focus on: asset allocation. This means that you have to maintain a balance between different types of assets. This covers your split between riskier options, such as stocks, and safer but less lucrative investments, such as bonds.
In general, when you are younger, you want to invest more heavily in stocks. With many years left in your life and before you retire, you can take more risks as you have plenty of time to get over any market dips.
As you get older, asset preservation becomes more important and you will want to shift your asset allocation more towards bonds and other fixed income investments that are unlikely to cause your money to disappear, even in the short term.
Diversification is key
Another important part of investing, no matter how much money you’re working with, is making sure your portfolio… diversified. This means investing in different companies and financial instruments, rather than putting all your money into one industry, sector or company. This protects your portfolio against large market losses in specific sectors, such as healthcare.
Think of it this way: If you invest all your money in the ABC Widget Company and it goes bankrupt, you will lose all your money. If you split your money between five different companies, especially if they are in different industries, one company going south won’t destroy your entire portfolio.
Focus on index funds and ETFs
Diversification can mean you end up researching a lot of companies, which is a lot of work. Moreover, there is no guarantee that you will make the right choices. An easy way to build a diversified portfolio is to use index-driven funds or exchange-traded funds (ETFs).
An indexed fund is a fund that follows a market index, a group of companies on an exchange that investment professionals track. Examples of indices include the Dow Jones Industrial Average and the S&P 500.
There are also indices that track certain sectors, such as technology, healthcare or energy. An index fund invests in this index so that your investment grows or shrinks with the overall market. If you put your money in indexed funds for the long term, your portfolio is likely to grow.
Include CDs in your portfolio
Certificates of Deposit (CDs) are not the most exciting investments, but if you want your money to last for the rest of your life, they are safe investments that will force you to save as well as solid – albeit unspectacular – growth.
CDs are financial instruments available from most banks. Essentially, you give the bank a sum of money and they hold it for a predetermined amount of time. The time frame can range from a few months to decades. The returns are generally low, but it is guaranteed as long as you keep the money within a certain time frame. There are significant penalties for early withdrawals, so there are great incentives to keep your money there.
Buy a few CDs – or maybe one CD ladder, which is a series of CD investments with staggered maturity dates – will provide a guaranteed and stable return and allow you to save some of your money in a place where you essentially can’t touch it. Another bonus of CDs: they are FDIC Insured up to $250,000.
Annuities are an option
annuities may seem a little complicated, but it’s actually an easy way to create a guaranteed income stream. They are in fact contracts with insurance companies. You pay a monthly, annual or one-off premium and in return you receive a fixed income, which starts at a later age or immediately.
There are different types of annuities, which a professional advisor can explain to you, but using annuities — especially when you’re nearing the end of your life — can be a solid way to make sure your money lasts.
Investing in real estate
One of the most important investments you can make is in property. This can be your primary home – the place where you actually live – or a rental home. If you invest well in real estate, especially if you can buy without a mortgage, chances are your investment will grow over time. As you get older, you can sell all the properties you own and probably see a big profit.
Rental housing can provide you with a steady stream of income throughout your life. However, remember that being a landlord comes with maintenance and upkeep responsibilities. So be sure to factor those costs into account when considering any of your investments.
If you have $5 million to invest, the most important thing to remember is to look for a variety of investments with a range of risk levels. Diversifying your portfolio, possibly through index funds, should provide you with a roadmap to a happy and easy financial life. The idea is that you can retire early and enjoy your family and friends. And don’t forget about annuities and CDs.
Financial aid is a good idea for everyone, but especially for people who want to invest large amounts of money. Finding a Qualified Financial Advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches for free to decide which one is best for you. If you are ready to find an advisor who can help you achieve your financial goals, start now.
Still working? Remember to use a workplace retirement account such as a 401(k), if you have access to it. This is a tax-efficient way to put money aside. Make sure you take advantage of every employer match also available to you.
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