Before you can get to $1 million, you must first get to $100,000. Even though $100,000 doesn’t purchase the same amount of stuff as it did way back when, $100,000 is still a nice chunk of change. Let’s go through how I’d invest $100,000 today.
With $100,000, you can pay for four years of tuition at public university. You could also buy one Patek Philippe complication watch or a BMW M4 and still have $20,000 leftover. Of course, you could wisely invest the money as well.
Ever since getting repeatedly kicked in the nuts working in finance, I’ve focused most of my effort on turning new capital into. I wanted to have children one day. Most of us should be able to earn between 2% – 5% in relatively low-risk ways. Therefore, $100,000 should be able to generate $2,000 – $5,000 a year.
Currently, I’ve got about $145,000 in cash, which is more than what I normally keep for random expenses. The cash has been piling up due to a surprise real estate crowdfunding distribution and stronger-than-expected rental income from my vacation property in Tahoe.
As a result, I’ve got to figure out how to invest the $100,000+. Perhaps you too have a good amount of cash piling up and are looking for ideas on what to invest in as well. Let me share with you what I’m thinking.
Please note, this is not my investment advice to you. This is a deep-dive mental exercise on how to best allocate capital today for potentially greater returns and more joy.
How I’d Invest $100,000 Today
Before investing, it’s a good idea to look at all your existing asset classes. Go through them one by one and analyze their investment cases. After all, for every dollar you invest in one asset class, it is one less dollar you have to invest in another asset class.
How much you diversify your investments is partly dependent on where you are on your financial journey. If you’re in your 20s, perhaps a concentrated position in your favorite asset class is appropriate.
For me, I’ve spread my chips around because I can’t stand losing a lot of money. Visible loss is also why I like to invest in alternative investments and private funds. The wealthier you get, the more you won’t mind paying a fee to have active managers try and make money for you.
The S&P 500 – Up To $30,000
With the S&P 500 back around 3,700, the market is looking more attractive again.
The S&P 500 is still overvalued based on The Buffett Indicator, which is the ratio of total United States stock market valuation to GDP.
Then there’s the traditional P/E ratio. The current S&P 500 10-year P/E Ratio is at about 16X, equal to the 10-year average trailing P/E ratio. As a result, the stock market is fairly valued.
Whenever an opponent is playing out of his mind in tennis, to stay in the game, I always tell myself he will revert back to his mean. Invariably, he always does. Of course, the stock market isn’t a tennis opponent. It can always get better. However, when asset allocating new capital, I’ve found it helpful to look at historical valuation bands.
As earnings continue to rebound, valuations will decline if the S&P 500 stays at the current level. However, given we’re above the historical average, earnings need to aggressively beat expectations for the next 12 months. The higher the expectations, the greater the potential for disappointment.
Here is my stock market forecast for 2022. But with the Fed now aggressively raising rates, I’ll be thrilled if the market gets back to 4,500 for the year.
One of the main arguments for why stock valuations should be higher is because interest rates are low. Bonds simply don’t look very attractive in comparison. However, if interest rates continue to creep up, we should expect stocks to normalize and come down.
I would invest $30,000 in the S&P 500 today. My overall net worth in stocks is down to 30%. My historical asset allocation of net worth in stocks is between 20% – 35%.
Bonds – Up To $30,000
With the 10-year bond yield jumping to 3.5%, I invested in bonds again. Since I don’t believe there will be that much equity upside and I believe inflation will decline over the next 12 months, 3.5% is relatively attractive.
As a person who wants to re-retire, I am happy that my current passive income streams will be going up.
Below is my latest estimated passive income investments. Bonds account for about $33,600 a year in annual interest income. However, that’s based on when the 10-year Treasury bond yield was at 2%. Therefore, I see at least $15,000 in further bond income upside as rates have risen.
Speculative Investments / Individual Stocks – Up To $20,000
With cryptocurrencies down over 70% from their highs, I’m a buyer of up to $10,000 worth of Bitcoin. I don’t find Bitcoin to be a great way to conduct transactions, unless you are doing something illegal. I’m also a buyer of HUT, a ethereum mining company that just listed on the NASDAQ.
Why use your Bitcoin to buy something when it could be worth more in the future? Whether you think cryptocurrencies are bogus or not, cryptocurrencies are here to stay.
With tech down 30% – 80%, I’m also a buyer of up to $10,000 in various names like Tesla, Twitter, and Amazon. These names have been hit by rising inflation expectations and rising labor costs. However, tech companies should be able to work through inflation issues better than most due to productivity gains.
I’m always going to invest in tech because tech is where there is usually the most innovation. All of my big winners (and losers) have come from tech. Part of the reason why I enjoy living in San Francisco is because I get to meet a lot of new people doing new things. The people I’ve met have also gotten me into various venture funds that have or are doing well.
Overall, I like to allocate between 10% – 20% of my investable assets in speculative investments. This way, if they blow up, I’ll still be alright. And if they become multi-baggers, then they’ll make a difference. And perhaps most curiously, I won’t suffer as much from.
Debt Pay Down – $20,000
Whenever I’m not feeling a lot of conviction, I always turn to paying down mortgage debt. Even though interest rates are very low, it’s still debt. And I’ve never regretted paying off a mortgage. The most surprising thing I experienced when I paid off my first mortgage was how much less motivation I had to hustle. When you free up more cash flow, you naturally don’t need to work as hard.
I will be spending $20,000 immediately towards paying down my vacation property mortgage. The rate has been fixed at 4.25% and cannot be refinanced since it is a condotel mortgage. During the 2008 financial crisis, the 30-year fixed mortgage rate was actually at 5.875%. Thankfully, I got a free loan modification.
There’s only about $22,000 left of debt to go. Once I pay it off, it will free up $2,480 a month or almost $30,000 a year in cash flow. Then it’s off to focusing on my other rental property mortgage at 2.625%. This mortgage used to be my primary residence until I rented it out in January 2020.
Stay On Top Of Your Asset-To-Liability Ratio
Because I also bought a forever home in 2020, I levered up further. I was able to get a 2.125%, 7/1 ARM primary residence mortgage, partly thanks to relationship pricing.
Since real estate has done well since purchase, the returns over the cost of debt kind of feels like free money. Therefore, I have no problem using some extra cash to pay off my higher rental property debt at 2.625%. Mortgage rates are still very attractive if you want to check online. The 15-year mortgage looks especially enticing today, averaging below the 5/1 ARM average rate.
As you consider taking on debt to buy a home or some other asset, please pay close attention to your asset-to-liability ratio. Leverage feels nice on the way up, but feels terrible on the way down. Right now, times are good. But it is during good times when you should be the most proactive.
Before you declare financial independence, I think you should shoot to have an asset-to-liability ratio of 10:1 or higher. This way, you will have full peace of mind your debt will never get you in trouble.
Hospitality Real Estate – Up to $35,000
The one thing I’ve clearly noticed is the surge in hotel, Airbnb, and VRBO pricing this summer. My stronger-than-expected vacation rental income in Lake Tahoe is evidence that travel demand is back. People are booking months in advance.
Recently, I was looking to rent a very normal-looking 5-bedroom house in a middle-class neighborhood in Honolulu this summer. It would have cost me $32,000 for the month plus cleaning fees and other charges.
And you know what? I’m tempted to pay it because it is close to my parents’ house. Further, we’ve made good investment returns since the pandemic began. Before the pandemic, I might have been willing to pay $10,000 for the month for this property.
The Opportunity Cost Of Not Investing
But instead of spending $32,000 + fees to rent this home that has three other properties on the lot and is not a “manor,” I’d rather invest the $32,000+ in a hospitality real estate deal instead!
This is the consistent and common “problem” we personal finance enthusiasts have. Opportunity cost. After one month of lounging around the pool, my $32,000+ would be gone forever.
What if I find a hospitality deal on CrowdStreet in a city that is about to see a massive influx of visitors for years to come? At a 10% Internal Rate Of Return (IRR) for 5 years, my $32,000 would turn into $51,536. It’s worth signing up for free to take a look.
Now let’s say the 10-year bond yield rises to 3% in five years (unlikely) and I could somehow get an A-rated municipal bond that paid me 4% for 25 years. I could then collect a healthy tax-free $2,061 a year in passive income for a very long time!
In my investment-focused mind, having perpetual income beats out one month of temporary pleasure 99 out of 100 times.
The Solution To Living It Up Responsibly
At some point, we have got to start spending our money for a better life, rather than always investing it. We must do our part to contribute to YOLO Economy right? After all, many of us are wealthier now than before the pandemic began.
Here’s the solution to living it up responsibly. Go to the maximum of what you can afford. Explore it. Pretend you actually do spend that kind of money. Then come to a compromise. Psychologically, it will make you feel like you’re getting a good deal.
For example, let’s say your family could afford to pay $32,000 for a monthly vacation rental. But if you spent that much money, you would feel like a donkey. Instead, do what Economy Plus does for people who feel bad about paying for First Class, even if they can afford to. Come to a reasonable compromise.
Why not try and find a decent $12,000 a month vacation rental and invest the other $20,000 instead? This way, you can still make great memories while also investing for your future. A double win!