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. 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 passive income. 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 tax refund, 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 S&P 500 – Up To $10,000
With the S&P 500 above 4,200, I’m not enthusiastic about investing new cash in the index. We’re already at my year-end target price and I’m uncertain whether to lift it further.
The S&P 500 is overvalued based on The Buffett Indicator, which is the ratio of total United States stock market valuation to GDP. The aggregate U.S. Market Value = $52 trillion. The annualized GDP estimate is roughly $22.6 trillion. Therefore, The Buffett Indicator is at 231%, which is 85% higher than the long-term trend line.
Then there’s the traditional P/E ratio. The current S&P500 10-year P/E Ratio is 37.2. This is 88% above the modern-era market average of 19.6, putting the current P/E 2.2 standard deviations above the modern-era average.
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 so far 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.
One of the main arguments for why stock valuations should be higher is because interest rates are lower. 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. We just don’t know when or by how much.
I would invest $10,000 if there is another 2-3% correction like we saw in May. Otherwise, I’m not buying the S&P 500 index for now. I’m already fully allocated in stocks based on my risk tolerance. In fact, I went from about 32% of overall net worth in stocks down to 30% recently. My historical asset allocation of net worth in stocks is between 20% – 30%.
Bonds – Up To $20,000
After the 10-year bond yield rose from about 1% at the beginning of the year to 1.73% on March 19, we’ve been in a holding pattern between 1.53% – 1.6%. If the 10-year gets back to 1.7%+, I’d invest $10,000 in a Treasury bond fund. If the 10-year gets back to 2%, I’d invest $20,000.
Bonds are more attractive today than they were last year. However, there seems to be very minimal upside opportunity, if any, at current levels.
To believe in upside, you must believe the 10-year bond yield will decline again. With the economy opening up and the government committed to spending more money to boost the economy, higher inflation expectations will keep bond rates elevated. Therefore, I’m not buying bonds for now either.
Speculative Investments / Individual Stocks – Up To $20,000
With cryptocurrencies down 40% – 70% from their recent 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. 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. Maybe I’ll look at NFTs again, since they’ve also crashed.
With tech down 10% – 30%, 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 investing FOMO.
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 $120,000 left of debt to go. Once I pay it off within 12 months, 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.
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.
Below is my suggested net worth and asset-to-liability target ratio by age. Of course, if you can get to a $3 million net worth with an asset-to-liability ratio of 10:1 or greater at an earlier age, then even better. You will have even more time and flexibility to do whatever the heck you want.
Hospitality Real Estate – $35,0000
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.
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 the 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!
It’s worth searching for hospitality deals in good locations today. We know that hospitality got crushed during the pandemic. But for those who are still standing and who are seeking capital as business revs up, I think there’s an opportunity.
Of course, you can also invest in a more diversified real estate fund for general exposure. It all depends on your risk-tolerance and current asset allocation.
One Last Splurge That Doesn’t Build Passive Income
For the first time in 15 months, I went to the shopping district in downtown San Francisco. I had a doctor’s appointment, so I figured why not visit some stores now that I’m fully vaccinated. One store I visited was Shreve & Co, my favorite watch store.
I hadn’t realized this, but it now costs $1,100 if you want to clean and change some springs in an automatic luxury watch! Back in 2008, the cost was “only” about $500. Rolex, for example, recommends its $1,100 cleaning every 5-8 years. You drop off your watch at a dealer who then sends it to Rolex HQ in Geneva, Switzerland.
Inflation truly creeps up on us. We often anchor prices at a certain point in time. The mind doesn’t naturally do compound interest calculations. Therefore, please find ways to own assets that tend to appreciate in value.
With the remaining $25,000 in funds earmarked for better entry points in the stock and bond market, I’m thinking it might be time to get a watch. Like cars, I used to buy and sell luxury watches all the time for profit and for personal enjoyment. Maybe it’s time to buy a forever watch at my age.
One timepiece which I find interesting is the 42 mm Panerai Submersible with a black ceramic bezel. Perfect for wearing in the hot tub while voice dictating a post! The cost? $9,800 pre-tax. Check it out.
But do I really want to spend $9,800 pre-tax on a timepiece? I could buy a $130 Casio G-SHOCK that works great the next time I go scuba diving 200 meters below sea level. Then I could invest the remaining $9,670 in a speculative investment that might one day turn into $100,000!
Then I’d be right back to where I started, writing this post again. Where’s the joy already?!
Letting Existing Investments Do The Work For You
Unless the stock market falls by greater than 30% and the real estate market declines by greater than 15%, my family should have enough passive income to last indefinitely.
Given I believe the housing market will continue to stay strong for years to come, I expect rental income to increase. Further, I also expect dividend payouts from blue-chip companies to increase as well. Therefore, it may not be necessary to continue investing as aggressively anymore. Your current investments may just naturally continue to grow on their own.
If you’re thinking about retiring or taking things easier, now might be one of the best times ever as the U.S. opens up. If you have enough money to be happy, you just need to fight greed.
Undoubtedly, if the bull market continues, many more people are going to get much richer than you if you take things easier. You just have to be OK with that as you spend more time on more important things.
Readers, how would you invest $100,000 right now? What are the most attractive investment opportunities? Or, would you rather spend the $100,000 on luxury goods and experiences? How would you invest $100,000 for more joy?