If you recently found yourself with $200,000, you either deserve condolences for your loss and recent gain or hardy congratulations on your recent prosperity. Either way, it can put you in a bit of a pickle trying to find the best way to invest your funds. The key to investing is to know the best product. The answer to that dilemma is that there is no one product or investment to serve you best. Instead, a combination of long term investment options and balanced asset allocation should be the goal.
Determine if you'd benefit by paying off your outstanding bills prior to investing. If you have high interest rate credit cards or other accounts, pay these first. You'll pay taxes on the growth of your investment and that reduces your return. In the highest tax bracket, a 6 percent return ends up less than 4 percent once you pay taxes. Because you can tax-deduct mortgage interest, it may not serve you best to pay off that loan unless you have an excessively high interest rate.
Open a money market account while you decide how to invest the funds. A money market account allows you to write larger checks, yet gives you a competitive interest rate while you decide. This account is nothing more than a holding account while you can investigate all your options.
Keep some of your funds liquid. No matter how you invest the other funds, keep a few months of income liquid for emergencies. Even though you can access mutual funds, you don't know the price when you'll need the money most. The same is true of stocks.
Allocate your money to a wide variety of investments; this is referred to as asset allocation. Choose some investments in stocks, some in bonds and some from other investments such as CDs. The longer you are able to invest the money, the better your chances are of having a successful investment. This way, if the market drops, you'll still have a long time for it to recover before you need the money.
Diversify your investments. Even if you have stocks, bonds and money market accounts, if your stocks are all in one industry such as technology, you face a huge potential for loss. Of course, if you lucked out and picked a winner, you'll also make big gains, but that normally doesn't happen. The easiest way to diversify is to use mutual funds or ETFs for investments. Choose funds and ETFs in different sized companies, including large cap, mid cap and small cap, with different types of businesses. Put some in value stocks, some in stocks that normally pay dividends and others in growth stocks.
Keep $500 to $1,000 to the side for your riskier investments or individual stocks if you want to walk on the wild side. Use this money to grow any way you like, even if it's in one individual stock. Some people love the idea of studying stocks and investing. These funds can be great training ground while you learn without jeopardizing your entire $200,000.
Seek out the services of a financial adviser if you're uncomfortable investing on your own. Understand all the associated costs before you start investing, and interview several advisers until you find one that you feel comfortable with.
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