6 Tips to Invest and Use $5 Million
Editor’s Note: This story originally appeared on SmartAsset.com.
A $5 million retirement fund may seem like an impossibly large amount of money, but if you aren’t careful, it can run out quicker than you’d imagine. Through some simple investing strategies, though, you can make $5 million last you a very long time. In fact, it’ll likely be long enough that you can retire and enjoy life with your family and friends, regardless of how old you are right now. All it takes is a bit of patience and know-how, and your $5 million can keep you going for a long time. For help managing your $5 million,
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 keeping a balance of various asset types. This namely covers your split between riskier options, like stocks, and safer but less lucrative investments, like bonds.
Generally speaking, while you’re younger, you’ll want to invest more heavily in stocks. With many years left in your life and before retirement, you can take more risks, as you’ll have plenty of time to ride out any market downturns.
As you get older, wealth preservation becomes more important, and you’ll want to shift your asset allocation more towards bonds and other fixed-income investments that will likely not lead to your money disappearing, even in the short term.
Diversification Is Key
Another important part of investing, regardless of how much money you’re working with, is to make sure your portfolio is diversified. This means you need to invest in various companies and financial instruments, rather than putting all of your money into one industry, sector or company. This will protect your portfolio from large market losses in specific sectors, like health care.
Think of it like this: If you invest all of your money in the ABC Widget Company and it ends up going bankrupt, you’ll have lost all of your money. If you divide your money among five different firms, 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 that you end up having to research a lot of companies, which is a lot of work. Furthermore, there’s no guarantee that you’ll 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 one that follows a market index, which is a group of companies on a stock exchange that investment professionals follow. Examples of indexes include the Dow Jones Industrial Average and the S&P 500.
There are also indexes that track certain sectors, such as technology, health care or energy. An index fund invests across this index, so your investment will grow or shrink along with the overall market. If you put your money in indexed funds for the long run your portfolio is likely to grow.