With five million dollars in your pocket, you’re looking at a wealth of opportunities. With the right investment strategy, you can put your assets to work in a way that could change your life.
Understand Your Financial Goals, Timeline and Risk Appetite
Whether you have $5,000 or $5 million to invest, there are three core concepts that every investor needs to understand to build the right foundation for success.
What Are Your Financial Goals?
Outlining your financial goals is always the first step in the investment process. You can’t get very far if you don’t know what you want to achieve.
If retirement is your goal, a $5 million investment can go far. Are there causes dear to your heart that you would like to support with charitable donations? Perhaps you’re in the market for a second home, or you’d like to leave a substantial inheritance for your children.
Take time to record your goals and decide what kind of annual return is necessary to achieve your objectives.
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What Is Your Investment Timeline?
Your investment timeline—also called your investment horizon—is a function of your age and your objectives. Younger people with a longer timeline can afford to buy riskier assets, while the older you get, the less risk you should have in your portfolio.
What Is Your Risk Appetite?
Risk appetite is closely related to your investing timeline but it really is all about your temperament.
How would you react if your investments lost value in a bear market? Are you willing to endure short-term losses to potentially make big-time gains?
Questions like these help you decide how much appetite you have for risk. Self-awareness is important, and the goal is to assume a reasonable level of risk for the return objective.
Your goals, timeline and risk tolerance help you choose the right asset allocation, which is the amount of money to be invested in different assets, such as stocks and bonds.
How to Invest $5 Million in Stocks
Stocks are at the heart of everyone’s investment strategy. Investors with higher risk tolerance might opt for a portfolio of individual stocks. More risk-averse people might invest in stock mutual funds or exchange-traded funds (ETFs). Either way, you have options
Growth Stocks and Value Stocks
Equity investors love growth stocks, which are shares of companies that are growing their revenues, profits and cash flow more quickly than the rest of the market.
Value stocks are shares of companies that have been undervalued by the rest of the market, usually, because of bigger trends unrelated to the company’s own business. Think of them like stocks that are temporarily on sale—buy now, and wait for the rest of the market to catch up with you.
Dividend Stocks
Many, but not all, companies return excess cash to their shareholders in the form of dividends. The best dividend stocks offer double value to investors: They provide income and also offer the potential for share price appreciation.
Preferred Stock
Preferred stock combines the advantages of a dividend stock with the safety of fixed income. They always pay dividends, calculated as a percentage of their par value. If a company goes bankrupt, preferred shareholders have a better chance of getting their principal back.
Build a Stock Portfolio
Growth and value stocks are both suitable for long-term investors but tend to perform differently in various market conditions. When one is in favor, the other is usually lagging.
Whichever investing strategy you favor—growth, value or thematic—your stock portfolio should be built to weather any sort of market. If you’re extremely risk-averse or want to generate income, you’ll want to look at dividends and preferred stocks.
How to Invest $5 Million in Fixed Income
Bonds—commonly referred to as fixed income—have a vital role to play in every portfolio. They’re a valuable source of diversification, and holding bonds can reduce risk since they tend to increase in value when stocks decline.
Companies and governments borrow money by issuing bonds. Each bond carries a face value, known as par value, as well as a maturity date and a coupon rate that tells you how much interest they pay. Coupon payments can be annual or semi-annual.
For example, a 4% coupon on a bond with a $1,000 par value will pay $40 per year, or $20 every six months. When the bond matures, the company repays the principal.
Bonds come in many flavors for all kinds of different risk appetites:
- U.S. Treasurys. The safest bonds are issued by the U.S. Treasury. The rate paid on U.S. government bonds is used as a risk-free rate in financial calculations. Maturities can range from several weeks to 30 years.
- Junk bonds. Rating agencies like Standard & Poor’s and Moody’s assign credit ratings to bonds, and corporate issues run the gamut from AAA—the highest quality—to low-rated junk bonds, which are suitable only for investors with a taste for risk.
- Municipal bonds. Local and state governments issue municipal bonds to pay for public projects. In most cases, interest income from munis is exempt from federal and state taxes.
Bonds are well suited to retirees and any other investors who want to generate income with relatively low risk. But fixed-income investments should play a part in your strategy for investing $5 million, too.
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How to Invest $5 Million in Real Estate
If you’re looking to invest $5 million, real estate can play an important role in your plan. Just beware that real property comes with certain drawbacks: The market is volatile and prone to bubbles, while liquidity is low.
Buying rental properties can offer attractive income streams but can also involve a lot of effort. You’ll need to maintain the property, collect rent and cater to tenants. The good news is that you can hire a professional management company to deal with the work, but extra fees will reduce your returns.
People with a taste for DIY often enjoy “flipping” houses, renovating them and selling them at a profit. Don’t try this unless you’re well-versed in the local market and know a lot about renovations. Choose the wrong neighborhood and you could be stuck with a house you can’t sell. Risks also include spiraling project costs, difficulty in obtaining permits, and the unavoidable headaches of dealing with contractors.
Real estate investing can indeed be lucrative, but costs and risks are both high. For investors who want return and diversification without the trouble, real estate investment trusts (REITs) offer an attractive option.
A REIT owns, operates, and finances real estate like shopping malls, office buildings, and apartment complexes. Aside from the diversification by including this asset class in your portfolio, REITs are obligated to pay 90% of taxable income as dividends to shareholders. Although cash flow can be attractive, these dividends are taxed at a higher rate than those paid on stocks.
REITs are also very sensitive to the state of the economy and tend to be volatile. Residential and healthcare REITs offer more protection against downturns than those invested in assets like shopping malls since they tend to be stable.
How to Invest $5 Million in Alternative Assets
Hedge funds, private equity and venture capital, plus commodities, real estate and collectibles like art, wine and classic cars are all considered alternative investments.
Investors tend to like alternatives because they have a low correlation to traditional asset classes and enhance diversification. They also hold up better in volatile markets, and some can even help hedge against inflation. Particularly appealing is the potential to generate higher returns than those offered by traditional asset classes like stocks and bonds.
Keep in mind that these alternative assets carry a much higher risk. Often unregulated, they are generally not registered with the Securities and Exchange Commission (SEC). Unregistered investments are not obligated to make much financial information public. The majority of alternatives—save derivatives and commodities—are not publicly traded and may be illiquid.
The good news is that people with $5 million to invest will have no problems accessing alternative investments. Because of the higher risks involved, the SEC restricts alternatives to accredited investors only: that means you need a net worth of $1 million (excluding the value of your primary residence) or annual income exceeding $200,000 ($300,000 for married couples).
Hire a Wealth Manager to Help You Invest $5 Million
With $5 million on the line, it’s best not to go it alone. This level of investment demands specialized knowledge and experience to manage appropriately. With objective and professional advice, you can make informed decisions while someone else does the heavy lifting.
With this level of assets, you likely meet the minimum to work with a private wealth manager. These are professionals who specialize in working with high-net-worth clients (HNWIs). When you choose to work with a wealth management professional, you get a significantly higher level of service.
A good wealth manager should have significant qualifications, perhaps including institutional experience, and will look at your wealth in a more holistic way than a financial advisor. You’ll receive highly personalized attention. You may also get access to a team of professionals to manage your affairs, including attorneys and accountants as well as estate planning and tax experts.
If you want to consider a financial advisor instead of a wealth manager, make sure you’re choosing an advisor with a fiduciary duty to clients. This means that they’re legally obligated to work in your best interest. Fees are likely to be based on assets under management.
Keep in mind that advisors who earn income through commissions are not fiduciaries and are required only to recommend investments that are suitable for you.
Choosing a professional to manage your investments is a highly personal decision. While qualifications are extremely important, personal rapport is also vital. Your goal is to choose someone with whom you can build a long-term relationship based on trust. The right professional will help you navigate life’s challenges, achieve your financial goals, and grow your wealth.
