As always, The Motley Fool cannot and does not provide personalized investing or financial advice. This information is for informational and educational purposes only and is not a substitute for professional financial advice. Always seek the guidance of a qualified financial advisor for any questions regarding your personal financial situation. If you'd like to submit your question for feedback, you can do so here.
**
If you have a lump sum of cash to invest, and your debts are all under control, what should you do? This is a question that a Reddit (RDDT 1.70%) user recently posted, and it's a very good one to look at more closely.
If you had $100k, zero debt, how would you invest your money?
by u/cinnamonbon12 in DaveRamsey
What I'm about to share isn't personal financial advice. I would need to be familiar with all aspects of your financial situation to make any customized suggestions. But I'm happy to offer some general steps you can take that will point you in the right direction.
The first suggestion I'd make is to answer two "test" questions that can give you a solid outline for your investment strategy.
Image source: Getty Images.
Question 1: How active do you want to be?
The first is asking just how active an investor you want to be. There are three basic levels:
- "I want to put money in an investment(s) and not have to check on it or worry about it."
- "I don't mind doing a bit of investment maintenance, but don't have the time, knowledge, or desire to own individual stocks."
- "I'm well-versed in the stock market (or plan to get there before investing real money) and would love to construct a portfolio of individual stocks."
If you are in the first group, it's probably best to look into a robo-advisor. This is a type of investing service where you deposit money, and the platform will construct an age-appropriate portfolio of investment funds. It's the best way to truly put your investments on autopilot.
If you're in the second group, definitely read on, but you'll be focusing on index fund investments, not individual stocks. There are hundreds of great index funds to choose from, and a well-constructed portfolio of passive index funds can be a great way to build wealth over time.
Finally, if you're in the third group, you've definitely come to the right website. While I can't possibly thoroughly discuss constructing a stock portfolio in a 600-word article, I'd encourage you to check out our list of some of the best stocks to buy, and to browse some of the other great content around Fool.com.
Question 2: How should you allocate your money?
Second, you need to determine your ideal asset allocation, unless you plan to use the robo-advisor route. Of course, there's no perfect rule for everyone. One popular guideline is known as the Rule of 110, and it's rather straightforward. Simply subtract your age from 110 to determine the percentage of your portfolio that should be in stocks, with the remainder in fixed income assets like bonds and CDs.
For example, I'm 43 years old, so this rule says that I should have about 67% of my money in stocks (or stock-based funds), with the rest in fixed income.
The idea here is that when you're young and have time to ride out the ups and downs of the stock market, more of your money should be there. But as you get older and preserving your capital becomes more of a priority, you should gradually shift money into "safer" assets like bonds.
Of course, you can customize this based on your own risk tolerance and investment goals. For example, if you are planning to retire early, it might be a good idea to err on the side of a higher fixed income allocation.
So, how would I invest $100,000 right now?
If I were starting from scratch (at age 43) with $100,000 to invest, I'd put about two-thirds of the money in a portfolio of top-quality stocks and exchange-traded funds (ETFs). A basic S&P 500 index fund like the Vanguard S&P 500 ETF (VOO -1.22%) makes a great portfolio "backbone," and I'd add some top stocks to the mix.
For fixed income, I generally use bond ETFs and CDs for my own portfolio. Buying individual bonds is a clunky process, and there's really no reason to do that instead of using an ETF like the Vanguard Total Bond Market ETF (BND -0.36%).
Of course, it shouldn't really matter to you exactly what I'd invest $100,000 in -- that is, unless you're a 43-year-old father of two with 15 years of experience analyzing stocks.
Having said that, the point is that by applying the results of the two questions presented earlier, you can help set yourself on the right path to build wealth while simultaneously preserving capital over a long-term investment strategy.
