Investing a million dollars is slightly different from investing $100,000 and $250,000. You can more easily afford to lose $100,000 – $250,000. But if you lose $1,000,000, you might enter a deep dark depression and never escape!
Once you have $1 million in investable assets and a paid off primary residence, you don't need to take excess risk anymore. Instead, you can cruise and live comfortably for the rest of your life in low-risk investments.
But given most of us always want more, let's see how we can grow this pot of gold in a responsible manner.
How You Invest $1 Million Depends On Several Variables
The way you'd invest a million dollars depends on how you obtained the million dollars. The longer and harder you worked for your million dollars, the more conservative you'll likely be investing it and vice versa.
The older you are when you obtain the million dollars, the more conservative you'll likely be as well and vice versa. The last thing you want to do is lose a lot of money when you're old and have already won the financial game.
In addition, how you invest your $1 million will also depend on how large the amount is as a percentage of your total net worth. The smaller the percentage, the more you can afford to take more risks.
Finally, the higher your income, the more aggressive you can invest the $1 million. A person who makes $1 million a year can take more investment risks than someone who only makes $50,000 a year.
For the purpose of this article, I assume the million dollars was accumulated through 10+ years of hard work and luck. The luck could include working hard at a startup that finally went public, selling a home you bought 20 years ago, or getting a large settlement from a divorce or accident.
Most people don't spend years accumulating a million dollars in cash and then decide to invest it all in one go. Instead, there's usually some type of windfall or liquidity event that triggers the need to invest such a large sum.
Having $1 Million In Investable Assets Feels Like You've Made It
Achieving a $1 million net worth is a great milestone. You'll likely feel satisfied with your achievement for several months. Then, thanks to hedonic adaptation, it's on to the next financial milestone, which is often being able to invest $1 million.
Once you're able to invest $1 million, you've leveled up your finances. For a good portion of those with a $1 million net worth, a large chunk of that wealth is comprised of their primary residence. Home equity is often considered “trapped equity.” Therefore, if you can actually invest $1 million or more, you may finally start feeling rich.
Being able to invest or spend $1 million gives you plenty of options. You could spend $100,000 after tax a year chilling on a Hawaiian beach before running out of money. Or you could do what most would do and invest that money to make even more money. Having a lifetime of perpetual passive income is ideal.
Let me share my latest experience with investing $1 million and how things turned out.
How I Recently Invested A Million Dollars
In 2020, I didn't have a million dollars in cash. But I did have several hundred thousand in cash and a municipal bond portfolio which I treated as a “cash plus account.” If you own municipal bonds issued by your state, they are state and federal income tax-free.
When I stumbled across a forever home in April 2020, I decided to slap fear in the face and buy it. But in order to do so, I had to liquidate a large portion of my municipal bond holdings.
In total, I put down $1,018,939 and borrowed the rest with a 7/1 ARM at 2.125%.
Based on today's comparable home sale, the $1,018,939 down payment is now worth around $1,700,000 before tax, including $110,000 in principal pay down. Therefore, the three-year gross paper gain is roughly 57%, partially thanks to leverage.
How I'd Invest If I Could Go Back In Time
If I could rewind time to mid-2020, I still would have bought our current home. However, I might have taken out a larger mortgage. Instead of putting down $1,018,939, I could have tried to put down only $550,000.
I would have then reinvested the remaining $468,000 into the S&P 500 when it was around 2,600. If I had done so, that investment would be worth about $750,000 today, or +60%. Meanwhile, my home equity would have grown from $550,000 to $1,100,000 for a total gain of ~$850,000.
There are just two problems with my ideal investment plan that would have returned about $300,000 more.
1) Needed a larger down payment than 20%.
I was competing against a retired couple who was willing to pay $100,000 more than what I ended up offering for my house. Therefore, if I had only offered to put down $550,000, the sellers probably would have passed, no matter how awesome my real estate love letter was.
The listing agent, who also represented me, helped convince the seller I was the lowest-risk buyer and would come through. Between April – July 2020, real estate transactions were getting canceled left and right.
2) Fear of investing in intangible assets
Another problem with my ideal investing scenario is that back in 2020 I was worried the world would never be the same again. My preference was for buying a real asset that could shelter my family in place for nobody knew how long. Even if the house declined in value, at least we'd be able to live a better life while we waited.
I did end up buying some stocks after publishing, How To Predict A Stock Market Bottom, on March 18, 2020. However, I only invested about $200,000 in stocks versus $1 million in real estate. Back then, I was simply too afraid to invest a lot of money in a highly volatile asset that provided zero utility.
We all like to think how we would have invested X amount in Y amazing investment if we could rewind time. It's fun to review things in hindsight. But don’t let revision history get the best of you because the information you had then was different.
Now that the Fed has hiked rates 10 times to 5% – 5.25%, I just realized something fortuitous. Selling a large chunk of my municipal bond holdings back in 2020 was ultimately a good move. The Bloomberg Aggregate Bond Market increased by 7.5% in 2020, -1.5% in 2021, and -13% in 2022.
How I'd Invest One Million Dollars Today
Now that I've shared my most recent experience on how I invested one million dollars, let me share how I'd invest one million dollars today.
If you are someone who wants to earn reliable passive income in a less volatile way, my thoughts on how I'd invest one million dollars will be more relevant.
As a middle-aged person with two kids, my #1 goal is to have 100% control over my time, not to maximize my net worth. I already felt like I had enough money in 2012, which is why I left work in the first place with a $3 million net worth.
If you are someone who is still rapidly trying to build your financial nut, then my suggestions for how to invest one million dollars may not be as relevant. Then again, if you ever have a one million dollar after-tax windfall at a young age, then you're set! You'll also want to invest the money as wisely as possible.
Here are my thoughts on how I'd invest the money. As always, please do your own due diligence before making any investment. Your investments are your decisions alone.
1) Purchase One More Rental Property – $200,000 – $300,000 Down Payment
I have been a landlord in San Francisco since 2005. It hasn't always been easy. However, you get better with more experience. Your leases get more thorough. You become a better screener of tenants. You also become a better negotiator for each purchase.
Owning rental property is an extremely powerful wealth creator. The combination of earning higher rental income and experiencing capital appreciation over time is a powerful one-two punch. You want to ride the inflation wave. Further, once you pay off your rental property, your returns become that much greater.
The window of opportunity to buy real estate in 2023 is open. I expect real estate prices to catch up to the rebound we've experienced in the stock market year-to-date. The goal is to buy 10% below last year's prices, and experience a 5% – 10% rebound over the next 12 months.
If I can't find a great rental property deal in San Francisco, than I will add $200,000 – $300,000 to my private real estate fund and Treasury bond allocation.
I don't really want to own another physical rental property since I'm at my limit of four. But if you have the time to manage more rental properties, there are now more deals.
2) Invest In A Private Real Estate Fund – $400,000
In 2017, I used $550,000 of my rental property sale to invest in a diversified private real estate fund. I sold my rental because it became a huge headache. My five tenants would constantly damage the place, pay rent late, and throw parties where neighbors complained.
Now that years have passed, I can confidently say the reinvestment was the right move. Simplifying life when my son was born was good for my mental health and family dynamics. Better mental health might be worth $500,000 alone.
Overall, my various private real estate investments have returned around 8% – 9% a year with ZERO headaches. The Fundrise Heartland eREIT actually went up 41% in 2021. Although, a couple of investments have also lost money or gone to zero. Hence, there are no sure things and all the more reason to invest in a diversified fund.
The wealthier you get, the more you value time. Therefore, if you've got $1 million to invest, you will likely want to invest in as many 100% passive income investments as possible.
Top Platform Is Fundrise
For most people, investing in a private real estate fund like those offered by Fundrise is the best way to go. Only if you have a lot of capital, time, and interest might it be better to invest in individual private deals and build your own diversified portfolio.
Investing in a public real estate fund or REIT is another option. However, as we discovered during the March 2020 meltdown, public REITs were even more volatile than the S&P 500.
3) The S&P 500 – Up to $200,000
With the S&P 500 trading at roughly 19X expected earnings with mid-single-digit earnings growth, I don't find the index attractive at the moment. I expect another recession to hit as the Fed's 11 rate hikes finally start working their magic 6-12 months later.
I've been investing in stocks since 1995. Since then, I've tried to be more disciplined when it comes to increasing and decreasing my asset allocation to minimize the impact of boom-bust cycles. As valuations surpass the 25-year average P/E multiple of 16.8X, I like to reduce exposure and vice versa.
That said, the S&P 500 could continue to trade higher given there is a lot of money sitting in money market funds. As inflation and interest rates decline, some of the money market capital will flow toward the stock market.
Money Market Fund Assets Could Drive The Stock Market Higher
Although the above chart looks impressive, here's another chart that shows money market funds relative to the S&P 500's market cap.
The below chart essentially shows a lot more cash could go to money-market funds or the S&P 500 is overvalued relative to money market fund assets and the Fed Funds target rate.
Allocating only up to 20 percent of the one million dollars to stocks at this point reflects my hesitation towards the S&P 500. The realistic best-case scenario is likely +7% from here to ~4,500. But an equally realistic downside scenario is -9% from here to ~3,900.
Therefore, I prefer waiting for a potential pullback in the S&P 500 below 4,000 before investing the up to $200,000. In the meantime, the cash can earn 4%+ in a money market fund and I just nibble in $10,000 – $20,000 tranches.
4) Treasury Bonds or CDs – Up To $200,000
I love buying Treasury bonds yielding over 5%. I'm also 80 percent certain we will no longer see 5%+ interest rates for CDs or Treasury bonds after June 2024. Inflation and rates should be lower by then. As a result, it's worth taking advantage of these elevated rates now.
If I was forced to invest my entire one million dollars in a one-year CD yielding 5.15%, I wouldn't complain. I'd earn a guaranteed $51,500 in interest income, which would be taxable if purchased outside of a 401(k), IRA, or Roth IRA.
After a 9% rebound in the S&P 500 YTD, I'm happy to lock in 5%+ for a total 2023 return of ~11.5%. In other words, I prefer buying a 5%-yielding CD or Treasury bond with a guaranteed return versus buying the S&P 500 at ~4,200 with no guarantee.
On the other hand, I'd rather buy San Francisco real estate and Sunbelt residential real estate because I think their returns will be greater than 5.15% a year from now. The greater the discount I can haggle for a property today, the greater the return in the future.
5) Search For Moonshots – No More Than $100,000
Ever since making a 50-bagger during the 1999 Dotcom craze, I've made it a habit to hunt for unicorns with about 10% of my assets. Some investments, like Tesla, have worked out. Most other investments, like a gas company I bought, have not.
Although investing $100,000 in single stocks, speculative small cap stocks, cryptocurrencies, or startups might sound like a lot, it's still only 10 percent of one million dollars. Focusing on percentages is the main way you can overcome your fear of investing more money the wealthier you get.
Many frugal folks have a difficult time investing larger absolute dollar amounts because our expenses don't grow proportionally with our wealth. Therefore, the goal is to allocate your pot of money with minimal emotion.
It's kind of like a general dispersing troops during a war. Some will be victorious. Some will become martyrs. But if you get too emotional, you might not end up doing anything to defend your kingdom.
Searching For AI Investments
Today, one of the biggest moonshots is investing in private AI companies. Most will fail, which is why I seldom do any angel investing. But some will become massive successes. I already own the majority of large public tech companies with exposure to AI.
To hedge against my failed private AI investments, I will stay invested in San Francisco Bay Area rental property to benefit from the artificial intelligence boom. I expect the area to attract billions of capital and create hundreds of thousands of new high-paying jobs over the decade.
Here's a conversation I had with Fundrise CEO, Ben Miller, on their new Innovation Fund that invests in artificial intelligence. 25% of its fund is in DataBricks, which is one of the leading software AI companies today.
6) Pay Down Mortgage Debt – $0
I usually like to counterbalance a moonshot investment with an equal amount invested toward paying down debt. This way, at least I know there will be a guaranteed return if a moonshot blows up.
However, with guaranteed risk-free returns higher than most people's mortgage rates, it doesn't make sense to pay down any mortgage debt at this moment. On the other hand, if you have consumer debt (e.g. credit card debt) that has an interest rate of over 5%, then pay it off before investing in Treasuries and CDs.
When inflation or the 10-year Treasury bond yield declines to ~3% again, I'll consider paying down extra mortgage debt again. I'd much rather “live for free” by investing in higher-yielding risk-free assets.
If you really want to pay down some debt with your one million dollars, please feel free. Even though it might not be the optimal financial move, you'll experience many benefits, including psychological ones. I've never regretted paying down debt in the past.
7) Invest In An Online Business – $100,000
The future of making money is online. Therefore, it's only logical to try and build an online business empire. If you can couple your online business with a passive investment income portfolio, you can live a very free life.
After focusing more on entrepreneurship since 2018, I see the clear merits of investing in a private online business. For example, I could buy one or two established websites and create synergies with Financial Samurai.
Alternatively, I could invest all $100,000 in Financial Samurai. The $100,000 could be used to update the site, add new features, create new products, record more podcasts, get more marketing help, and hire new writers. I'm pretty certain I can make greater than a 10% return investing in this website.
The problem is, once I try to monetize my joy, my joy quickly dissipates. I just want to write about whatever is interesting or on my mind. If money follows, then great. If not, no big deal because money is not the priority. This “writing strategy” has served me well since 2009.
8) Invest In Venture Capital – $100,000
If you have one million dollars in investable assets, you can now become a limited partner in many venture capital, venture debt, and private equity funds. These funds make investments that are normally inaccessible to you. As a result, investing in private funds offers diversification, access, and potential returns for a fee.
After the valuation compression of many private companies in 2022, investing in private funds that invest in private companies has become more attractive. These funds also tend to call capital and invest over a three-year period. This helps limit timing risk.
The biggest downside of investing in private funds is the high amount of fees compared to investing in real estate or stocks. The second biggest downside is the lack of liquidity if you find yourself needing money before the fund plans to return investor's capital.
9) Invest In Continuing Education – $5,000
After writing Buy This Not That, I've become a prolific reader. I used to think people who read 20+ books a year were crazy or fibbing. Where do they find the time?!
But now I see the light because I understand how much time and effort it takes to go deep into a particular subject matter. We're talking two years on average to write, research, and edit a 300-page book.
Instead of surfing the web before going to bed, I now spend 30 minutes each night reading. At this pace, I should easily be able to read one or two books a month. The knowledge I've gained from reading books will make future posts on Financial Samurai even better.
In addition to buying and reading a lot of books, I'm also going to invest in better podcast equipment and software to interview authors. After finishing each book, I always have many questions I'd like to ask the author.
By adding interviews to my podcast episodes, I should also be able to grow The Financial Samurai podcast even further. A virtuous cycle that's actually fun to do!
Invest Your Million Dollars Carefully
Once you have a million dollars to invest, it's easier to make millions more. However, I've also seen plenty of cases since my 2000 dotcom days where paper millionaires end up with nothing. Not only did they end up with nothing, but they also had to pay huge tax bills on stock options that were once worth something.
It is perfectly fine to make money slowly. Once you have a lot of money, making money slowly becomes a luxury worth enjoying.
With a million dollars, you can make $50,000 a year risk-free today. In comparison, the person with $100,000 has to take huge risks to make a 50% return just to match. Chances are high that they won't ever succeed.
If you have come across a huge financial windfall, don't be in a rush to invest it. Sit on it for several months while you carefully mull over various investment opportunities. See if a million dollars changes your spending habits and your attitude toward life. Hopefully, it doesn't, but you just never know until you have it.
I'll update this post every quarter as conditions change. But for now, this is how I'd invest one million dollars today.
Reader Questions And Suggestions
Readers, how would you invest one million dollars today? If you've ever had a million dollars to invest, how did you invest the money? I'm looking for as many good ideas as possible.
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