I am 56 years old. I just came into $100,000. What would you suggest I invest it in?
That's a nice windfall. You asked what you should invest it in and that can only be answered with a full understanding of your priorities and your current financial picture.
But rather than assume your $100,000 should be invested, I'd encourage you to consider broader financial questions like these:
- What are your financial needs, if any, right now? Single or married? Income level and tax bracket?
- Have you already funded a "rainy day" cash reserve for unplanned expenses? If not, that's your first priority with a portion of your windfall.
- Do you have any outstanding debt? If so, at what interest rate(s) and payment terms? And how do those interest rates compare with what you'd likely earn in the near-term if you invested the money instead of paying down debt? If you pay off a 6% loan, it's kind of like earning a guaranteed "return" of 6%.
- Are you already maximizing your retirement plan contributions (retirement plan through work and/or IRA or Roth IRA)? If not, would it make sense to allocate some of your $100,000 in that direction?
- Are you adequately insured against life's risks (life, disability, auto, homeowner's, etc)? And if not, can you allocate some of the windfall toward starting and maintaining adequate coverage?
- If your own retirement planning and financial picture is on track, do you have children in college or who will be attending soon?
Focusing for a moment only on your question of investing, I'd be cautious about fully investing your windfall in the current overpriced market environment. Here's some background . . . .
Most financial pundits today focus on stock market valuation in light of the last 12 months of earnings or the next 12 months of projected earnings. The trouble with that is we're not in any kind of a normalized, sustainable environment. Global central banks have goosed asset prices through monetary policy on steroids. Corporate profits are around 70% above long-term averages. We're now five years into a cyclical bull market recovery that has had no significant pullback. While the economy is recovering vs. the 2008-2009 recession, it's been moving at a glacial pace and nothing like the typical historical recovery. Even now, it's as if it still has a "low-grade fever," not quite bad enough to land in the hospital, not quite good enough to get up and dance.
In this context, I pay more attention to those analysts who measure current stock levels in light of longer-term historical valuations. And history indicates that, when US stocks are this overpriced, the next 7 to 10 years generally result in abysmal average annual returns (1% to 3%, for example).
Of course, that doesn't mean we're going to have an imminent crash, nor does it mean the markets can't (irrationally) march yet higher. It sure seems they want to push higher. However, it does imply that future returns have already been pulled into the present and there's significant risk in equities (and in bonds and other income investments) at current levels. So why accept the current level of risk when commensurate reward is unlikely to materialize? Why not keep some (or all) of your $100,000 windfall in savings for now and begin buying into the markets after a pullback, when good investments can be had at better prices than today?
Nobody can precisely or consistently time the markets, that's a given. But that's the answer to the wrong question. The question is not one of timing or trying to outperform the markets, but rather of paying attention to investment valuations--avoiding the true risk of overpriced investments and owning investments that are underpriced (and there aren't many of those today). This is a tactical approach to portfolio management and it's a minority perspective, but I believe it's the best approach in the current environment.
Hope this helpful. All the best.
Originally posted on NerdWallet's Ask an Advisor on June 11, 2014.