Forbes - Best Way To Invest $100,000 In Australia
Jody McDonald 27 March 2023
Whether it’s from winning the lotto, an inheritance, or the profits from selling an asset—coming into a significant chunk of money creates a range of investing opportunities. But the best way to invest a large lump sum of $100,000 will depend on many factors including your current age and financial situation, and the outcomes you’re looking to achieve. Let’s look at some of your options.
What To Consider Before Investing
Before you invest it’s wise to:
- Knock-down high-interest debts. In particular, pay off credit cards where the average interest rate paid on balances is 17.92%, as it’s less likely you’ll be able to achieve returns higher than that through investing.
- Put away savings for a rainy day. Everybody needs cash to cover costs like replacing a broken fridge, or in case you suddenly lose your job. Aim for enough to cover three-to-six months of living expenses.
Keep in mind that growing your wealth through investing is not a sure thing. Every type of investment carries some risk, so it’s important that only invest money you can afford to lose.
Even ‘safe’ investments like a term deposit or Australian Government bonds that offer guaranteed interest come with risk—primarily, the risk that you’ll miss out on better returns that could be made elsewhere, or not have money available when needed.
Know why you’re investing
Financial planner, CEO of Rekab Advice, and winner of the 2023 IFA Investment Adviser of the year, Amie Baker, says when you come into money it is important to sit down and consider not just your immediate financial needs—but what you want to achieve in five, 10, 20 or even 30 years.
“When we think about our future self, as well as our now, it might be easier to work out what to do with that money when you get a windfall, like $100,000 for example,” she said.
Consider when you’ll need the money
Baker said making your $100K work for you long-term to grow your wealth would entail a very different risk profile compared to someone who wants to invest over the short-term, and who might stick to conservative cash-based products like term deposits.
“First of all, we look at the timeframe in which they’re going to be invested for. Is it going to be a long term strategy? If so, consider the fact that you have time by your side to ride out the volatility that the financial markets can throw at you,” she said.
Diversify to reduce risk
A diversified portfolio, with allocations to a variety of both growth and defensive assets, can smooth out volatility across asset classes as well as provide good liquidity (the ability to turn assets into cash quickly).
“Of course, I always recommend you diversify your portfolio. That old saying—don’t put all your eggs in one basket,” Baker says.
Aim to beat inflation
Baker said people investing $100,000 should also consider how they’ll invest in order to achieve returns that exceed inflation, which in Australia is currently at 4.1%.
“You know your money’s working hard when it’s exceeding the average CPI—consumer price index—value,” she said.
Understand growth versus defensive assets
For a long-term strategy, Baker said you may want to consider a portfolio weighted more heavily to growth assets (e.g., equities, property) than conservative/defensive assets (e.g., bonds, cash). While growth assets are higher risk, periods of declining value can even out over time.
“If we’re going down the road of a 10-year strategy, two years of ups and downs is okay, because over the 10 years, we’re probably still going to maintain on average about 8% returns.”
She said a growth portfolio can also suit investors who expect to spend only a portion of their funds in a shorter timeframe—for instance, if you anticipate pulling out 10% in five years’ time.
Rate of Return on $100,000
Between 7% to 9% average annual returns on your investment is a realistic goal, according to Baker. She said that negative growth years are usually followed by a recovery period, and it was about “hanging in there” to steadily build wealth. You can increase the effect of compounding interest through regular additional contributions to your investment portfolio.
Here are some examples of potential returns on a starting balance of $100,000 calculated by Baker, based on various investing scenarios:
Why You Should Seek Advice First
Baker says getting professional advice helps you to understand asset allocation and compare various scenarios based on your individual situation, which allows you to feel confident in making an investment decision.
Weighing all your options with the help of an adviser can also ensure you:
- Avoid making a bad decision, or no decision: Baker says to be wary of being lured by ‘exciting’ opportunities like private equity deals, a family member’s business deal, or crypto schemes that promise better returns than a portfolio. “You just don’t know how that’s actually going to pan out. So you’ve got to really be doing a lot of research, a lot of homework, and that’s when we see people being sort of spread too thin or making those poor decisions,” she says. On the flip side, there’s the risk of being overwhelmed by too much information, delaying making a decision and losing the opportunity to make gains. “And it’s sad to see that they’re sitting at maybe earning 1% with a whole bunch of money, and then that slowly dwindles because it’s just so easy to spend when money is just in your bank account.”
- Know when to pivot when markets are underperforming: Baker says advisors communicate with clients to explain volatility in financial markets and provide advice on how it affects their portfolio. “And if there’s changes to the portfolio, we’d send you a record of advice to update that portfolio so that your money is still working hard for you,” she says. Getting guidance through market turbulence—when it’s tempting to pull out of investments and turn everything into cash—helps you avoid crystallising losses prematurely.
Ways To Invest $100,000
Ways To Invest $100,000
Here are six examples of how you could invest $100,000 based on some common financial goals.
1. Boost your retirement savings
Baker says that whether your retirement is far away or within a few years, it could be worth putting your bonus $100,000 into your existing superannuation investment, because it is a far more tax-effective strategy.
In particular, if the $100,000 was gained through the sale of an asset and capital gains tax (CGT) will be owed, you may be able to offset some of your CGT liability by making concessional super contributions via unused carry forward limits, then claiming a tax deduction. Or make a non-concessional super contribution, which isn’t taxed if the contribution is under the $110,000 cap.
“And you’re going to be growing that money until you actually need to withdraw it, and you can withdraw it after preservation age—after 60. Or you can commute it over into an account-based pension and add it to an income stream that will be effectively a tax-free income in your retirement years.”
2. Save for a short-term goal
Baker says cash-based investments could suit people with short-term goals such as going on a dream holiday or upgrading their home. Although the gains will be more modest, this approach can suit conservative investors who’ll need the money soon.
“So locking it away in a term deposit or high interest account for a couple of years, will still make sure that money is working for you.”
3. Grow a home loan deposit in five years
Building a balanced investment portfolio, with a 60/40 ratio of growth versus defensive assets, could help first-home buyers grow $100,000 to an even healthier deposit within five years. Baker says a more risk averse approach to asset allocation would help limit volatility over a shorter period.
“We don’t want to be in a situation where they’re close to getting that goal within those few years, and then something happens globally that can really shake things up in the financial markets and have them fall backwards a little bit and not reach their target in that timeframe,” she says.
The challenge lies in selecting defensive assets that can withstand economic woes and inflationary pressure.
“And it isn’t always straightforward and easy, because we’ve found even in the fixed income space, the last few years haven’t been that great.”
In terms of asset allocation, Baker says a typicall balanced portfolio might include:
60% growth assets, such as 25% Australian shares, 25% international shares, 10% alternative assets,
40% defensive assets, such as 20% fixed income, 18% international fixed income and 2% cash.
According to Baker, you could increase your $100,000 to over $248,000 within five years by investing in a balanced portfolio returning around 7% and making additional contributions of $15,000 annually.
“So, you’re now reducing that LVR (loan-to-value ratio) and you’ll be able to feel more confident with getting that mortgage.”
4. Cover costs of starting a family
Family planning is an important goal because having kids and paying for their care and education is expensive.
You could increase your $100,000 to over $248,000 within five years by investing in a balanced portfolio returning around 7% and making additional contributions of $15,000 annually
“With a windfall of $100,000 a couple may choose to invest and save so when they are ready, they can afford IVF if needed, extended maternity or paternity leave, and have future funding for childcare,” Baker says.
“Being 10 years, again the time’s on their side to deal with any volatility—so they can afford to take more risk because they’re not needing that money immediately.”
Baker adds that a more progressive portfolio—with an average 70/30 split between growth and defensive assets—could help you achieve a nice return over 10 years. She provided this example of asset allocation:
70% growth assets, such as 30% Australian shares, 25% international equities, 10% international listed property, and 5% alternatives.
30% defensive assets, such as 20% Australian fixed income and 10% international fixed income.
You could also look into protecting the $100,000 over 10 years via a tax-effective vehicle like a family trust or investment bond.
5. Grow your wealth for retirement in 20-30 years (outside of super)
Baker says a young person who inherits $100,000 may prefer to invest long-term so they know that it’s growing in the background but still available later on—say, when they’re married and looking to combine assets with a partner to fund their goals.
A growth-focused portfolio of 70/30, 80/20 or higher can align with a long-term strategy, but it depends on your unique risk profile.
Increasingly, younger investors looking to compound their wealth over time are constructing diversified portfolios using “done for you” exchange-traded funds (ETFs). Baker warns investors to ensure you don’t invest in multiple ETFs that are exposed to the same assets to prevent doubling up.
“If you decide to create your own ETF portfolio, you may decide to put a portion of funds in an ETF that is invested in the S&P200 and then an ETF invested in the ASX—now you have exposure to Australian and US equities—then another portion in an ETF that is invested in bonds (fixed income),” she notes.
“ETFs are a great DIY investment strategy, however, you do need to do the research first and know the risks involved when it comes to the purpose of the investment and the timeframe in which you want to be invested.”
6. Generate income during retirement outside of super
Retirees could seek to bolster their income by investing $100,000 towards a growth portfolio (70/30, 80/20 or higher) that combines Australian and international equities to both generate dividends and provide longevity through capital gains.
“…A portion of that portfolio is creating them dividend income that is also fully franked, so that they’re actually getting more bang for their buck at retirement and a very tax-effective strategy,” Baker says.
Baker adds that with the help of a financial advisor it is possible to manage a dividend income while also selecting certain assets to sell down your capital gains to create a cash amount on top that can be withdrawn as needed.
“There’s a lot of confusion where people think, ‘Well, now that I’m retired, I need this money so I’m going to change my risk profile to be more conservative.’ But the way I see it is, you’re only using a portion—the minimum withdrawal’s 4% of the balance.”
“I always ask the question, ‘Are you going to use all of it at once?’ And the answer is always going to be no. So, they can still afford to have that long-term growth strategy.
The Bottom Line On Investing a Big Lump Sum
Amie Baker says it isn’t unusual for people to put a large lump sum towards a variety of short and long-term purposes, especially given that some expenses may have been postponed due to higher costs of living.
“Often it’s a combination of we’re going to do some contribution to super to reduce that taxable income this year, and we might also look at what their goals are, then they might be dreaming of this holiday that they want,” she says.
“I believe we can have the cake and eat it too. It’s just a matter of being really smart about what you’re doing with your money.”