Answer: It depends. If anyone tries to give you a specific and simple answer to this question without knowing other details about your financial situation and goals, they are probably out of place – run!
Performing an internet search, you’ll find plenty of potential investing options ranging from low-cost index funds and ETFs all the way to actively managed trading strategies and even cryptocurrencies. But just because these are types of investments which are accessible with $10,000 obviously doesn’t mean they are right for you.
With so many options, a webpage that promises 5 or even 10 “best options” may seem like a good way to focus in, on the best investment choices, but this is not necessarily the case.
This article will include information to help you develop some perspective about managing your money to avoid taxes, fees and penalties as you consider ways to invest $10,000.
Some good questions to ask might include: Where are you financially right now? Is your cash flow stable? Are you saving a certain amount each month? How much?
And some questions specifically relating to your $10k:
Many people get excited about investing before they are truly ready to start the process. This is okay, but it pays to be cautious early in the process, so you don’t eliminate options later.
For example, someone called our office some time ago and wanted to know if we could help him find the money to get into more real estate investing. Talking with him we discovered he had virtually no liquid savings, but recently purchased his first investment property using a credit card for the down payment. The property was not cash flowing yet (new, and starry-eyed real estate investors often believe it will soon) and the interest on the credit card balance was killing him! This guy obviously wasn’t ready for real estate investing at the scale he was attempting – and his options were extremely limited.
So how stable is your financial foundation? We have a unique visual model using a toy donut stack that can help would-be investors decide if they are ready for investing. The elements include:
Get any of these elements out of balance or out of order and you could be setting yourself up for a less than ideal financial future. Here’s a quick video demonstration:
If you don’t know exactly what your cash flow picture looks like, the 10-20-70 system may be of help.
Assuming your cash flow is well-balanced, how do you know if your foundation is strong enough to consider investing? There is no one-size-fits-all answer, but here are some thoughts which may help.
Most people agree that having balanced personal cash flow and some money in reserve is wise. Some people think an emergency fund with 3-6 months of savings is adequate. Others prefer 6-12 months. Business owners or people who want to start a business, often desire a larger/longer reserve.
Many clients of McFie Insurancelike to build their emergency funds and further reserves through participating whole life insurance cash values so their money is not sitting in a savings account with minimal returns nor exposed to the financial markets until they feel ready to expand into investing with the risks that go along with it.
This strategy can provide a nice balance including the protection and saving aspects mentioned in the video above as well as having guaranteed cash value growth to help maintain high liquidity and the opportunity to self-finance major life expenses or make investments at a future date even in a potential market downturn without taking losses on market-based investments. More on this later.
When you understand where you are now, it becomes easier to set goals for where you want to be in the future. It’s helpful to recognize that a good goal will usually be broken down into manageable steps starting from where you are today.
For example: You may dream of being a millionaire, but unless you have a manageable plan to get there, this may not be a realistic goal (yet).
Many people want to achieve some type of financial freedom or have the ability to retire at some point. Successful realization of these goals will look different for different people. And just because you read an article online about what someone else did doesn’t mean that is the right solution for you.
This said, there are some considerations which can help you build sustainable wealth in the long run. It is wise to take some time to research and define what a strong financial foundation looks like for you and your family, and to set some realistic goals.
When you determine you are ready for investing, you can choose between different management styles. Investment styles are often referred to as either active or passive.
Active investors may study investment strategies and choose a combination of stocks, bonds, or other investment vehicles such as mutual funds that target special allocation models or tactics, with goals such as timing certain events or trends in the market.
Active investors tend to buy and sell investments in their portfolios more often than passive investors. Because of their greater activity and search for profits, active investors tend to pay higher fees/commissions than passive investors. Fees can add up to significant amounts over a long period of time, and active investors don’t always “beat the market”.
Passive investors tend to favor a buy and hold strategy with low management fees. They may consider a combination of low-cost mutual funds, index funds and/or ETFs which tend to follow the market over time and can help to diversify a relatively small portfolio. Although this approach can help to minimize fees for small investors, many large investors are also passive investors and believe in minimizing fees regardless of the account size.
Both types of investors may engage an investment advisor to help select investments and comb through various research to find investment options that will fit their needs. An advisor may even manage investment accounts for a client and do the trading. Some passive investors may use robo-advisors trying to minimize fees while keeping their portfolios balanced over time in a logical manner.
Sooner or later, you will come across the subject of risk tolerance. Risk tolerance is typically determined through a questionnaire that contains some factual questions and some questions to which the answers will be more subjective – usually including an evaluation of your emotional response to potential investment losses.
Answers to a risk tolerance questionnaire can be used as a basis for general information, and to help determine the suitability of certain recommendations from an investment advisor. It’s good to know that taking two different risk tolerance questionnaires can yield different outcomes because the questions and interpretation of the answers can contrast.
While considering risk tolerance may be a good starting point, some people like to consider the subject from a perspective of loss avoidance as well. This means considering how to limit losses and how much you would be comfortable losing before feeling like you would need to change an investment strategy.
Depending on your strategy, the way you respond to investment losses may vary. It is usually a good idea to consider your response to a loss ahead time, so you are not trying to make an important decision during the emotional processing of an actual loss.
Investments are commonly made through tax-qualified retirement plans/accounts such as a 401(k), Traditional or Roth IRAs, SIMPLE IRAs and many others. Retirement plans usually confer special tax benefits which provide a short-term incentive for contributions, then taxes are paid (usually on a greater amount) when income is withdrawn in retirement.
Roth type retirement accounts do not provide a tax benefit on the front end, but usually allow for tax-free growth, as well as tax-free withdrawals after age 59 ½. Most tax-qualified accounts have contribution limits and special rules to follow, and typically you cannot invest in anything that may personally benefit you as the account holder or you may incur a penalty.
A lot of typical financial advice says to max out tax-qualified retirement plans, and while this can save taxes in the short run and yield higher account balances, this does not mean you will pay less taxes in retirement, that you will have better investment options or even end up with more money after taxes.
If you decide to access your theoretical $10k investment before age 59 ½, to make another investment, such as starting a business, then realize you can be faced with a 10% penalty to withdraw money from most tax-qualified plans.
Investments can also be made through brokerage accounts which receive no special tax favors, or directly by investing in assets such as real estate, currencies or even a business venture.
Once you select an investment account and fund the account, you can choose from the types of investments available within the account type and available at the brokerage or custodian selected. Investments available in most account types include:
For further detail on different types of investments, checkout our article on the different types of investments.
Note: Investments in an employer-sponsored retirement plan are commonly limited to 20-30 pre-selected investment choices.
McFie Insurancedoes not provide investment advice; however, we have watched many of our clients over the years and have seen some of the investments they made – some successful and some not so much.
Based on what we’ve noticed, we believe common sense suggests that it is a good idea to stay informed and involved in whatever investing strategy you choose. We’ve noticed that people who tend to do well with investing are the ones who take it seriously as a business venture and don’t just blindly trust an expert to tell them what investments to make.
These responsible people may still use investment advisors, brokers and other financial professionals to draw upon their specific knowledge and experience, but at the end of the day they often call the shots regarding strategy and tend to have a good understanding of the potential upsides and downsides for the various investments they make.
In our experience, people who start a foundation through cash value reserves in life insurance tend to have more options when it comes to investing than people who start by investing and try to add protection and cash value reserves for more balance later in life.
Example: Many of our clients have used their cash values to start family businesses or buy real estate which they can fix up and rent out. Some of these opportunities would not have been available to them unless they had the liquidity through their life insurance cash values to quickly get a policy loan and make these investments.
Having a reserve in life insurance cash values can also make a strong strategy approaching retirement. We find that people who have a nice balance of assets in life insurance as well as other investments have more options for passive income as they approach their golden years. They also have less reason for immediate concerns about market volatility since they can draw passive income from life insurance cash values in years when invested accounts are down.
At McFie Insurancewe specialize in designing participating whole life insurance policies with high cash value to maximize the savings/reserve aspect of a strong financial foundation while also getting you the life insurance protection which can become a legacy if/when you no longer need the death benefit for income protection.
We encourage our clients to avoid fees, penalties and unnecessary taxes whenever they reasonably can because we know that when people keep more of the money they make, they have more peace of mind and confidence looking to the future.
So, if you have an extra $10,000 sitting around, yes, it can potentially do a lot better working for you than just sitting in a bank account somewhere earning a nearly non-existent return.
Whether you choose to build a reserve with strong guarantees in a life insurance policy or look to investments with a higher potential return, and also a greater potential for loss, is up to you. A combination of both can also be good. We want to make sure you have the information to make a decision that best fits your needs and goals.
To find out how the life insurance strategy may complement your investing, checkout our Quick Start Guide. To see how the numbers for a policy would look in your situation, call us at 702-660-7000 and ask for a complimentary strategy session.
Note: Investing information provided on this page is for educational purposes only. McFie Insurance does not offer advisory or brokerage services, and does not recommend or advise investors to buy or sell particular securities.