How To Invest $500,000 Responsibly

Author: Chris Pineson

Last Updated: 05.03.2024

We’ve written extensively about how to invest generally, but there’s something fundamentally different about investing with as high a sum as $500,000. If you’re investing smaller amounts, your emphasis will necessarily be on growth. But something changes with a portfolio of $500,000. You now have something to lose!

Where can you invest with $500,000? At this level, income and capital preservation become much more important. This is especially true if you are either retired or nearing retirement age.

Once again, you don’t need to be an investment expert to invest safely and responsibly. The more you can automate your investment activities, the less stressful investing will be. And after all, isn’t the whole point of having money to live a stress-free, happy life?

Without further ado, let’s investigate the investment of options available at $500,000.

Where Can You Invest with $500,000?

Just as is the case with lower investment amounts, with $500,000 you can focus on stocks, real estate, and fixed income securities. But in this analysis, we’re going zero in on four different investment strategies:

• Capital preservation
• Income generation
• Growth
• Speculations

Each deserves a place in a portfolio of $500,000 or more. What it mostly comes down to is your own risk tolerance, and the specific allocation you’ll use between the four.

Capital Preservation

Whether it’s an emergency fund or a portfolio of bonds, capital preservation needs to be worked into every portfolio size. The purpose of capital preservation assets is to make sure that at least a portion of your portfolio will retain its value even in the worst of equity markets.

That will minimize overall losses to your portfolio, as well as enable you to keep liquid assets available to take advantage of the depressed prices bear markets create.

The safest assets for this purpose are fixed income securities. These include bonds, high yield savings products, and US Treasury securities. You can use any one of these asset classes for capital preservation, or even a mix of two or more.

Investments Emphasizing Capital Preservation

Bonds. These are debt securities issued by corporations and governments. They usually have a term of 20 years or longer, and are available in amounts of $1,000. They can be purchased through investment brokers, that sometimes require you to buy them in blocks of 10. You can also check out Worthy – they make buying bonds easy and cheap.

Interest rates on bonds are higher than they are on shorter term securities, and your principal is guaranteed at maturity. They can provide long-term capital preservation, and can even rise in value in a declining interest rate environment.

High yield savings products. These include savings accounts, money markets, and certificates of deposit (CDs). They’re available through banks and credit unions with:

• Terms ranging from three months to five years
• Minimum denominations of $0 to $10,000 or more
• Free of charge when purchased directly through the issuer

Most local banks and credit unions paid very low interest on these securities. A better option is to invest through online banks, like Ally Bank and Capital One 360, that pay much higher rates.

US Treasury securities. These securities represent US government debt. They can be bought, held, and sold – free of charge – through Treasury Direct. They also offer Treasury Inflation Protected Securities (TIPS), that pay interest, and add principal for protection against inflation.

The securities carry terms ranging from four weeks to 30 years, and can be purchased in denominations of $100. At this writing, US Treasuries are paying over well over 2% APY on all maturities.

Comparing Capital Preservation Assets

Income Generation

All the capital preservation assets listed above pay interest, which means they also generate income. But that income level is usually limited to the 2% to 3% range. There are other assets that can generate higher income levels.

There’s a trade-off with higher yielding assets. There’s a possibility you could lose some of your principal, however, there’s a also a good chance you’ll see capital appreciation if the value of the underlying assets increase.

What are those assets?

High Dividend Stocks

Many stocks pay dividends. But some stocks pay above average levels, and have strong track records of both paying and increasing dividend payouts steadily over many years.

These stocks are referred to as dividend aristocrats. A stock must meet the following qualifications to be considered a dividend aristocrat:

• Be in the S&P 500
• Have 25+ consecutive years of dividend increases
• Meet certain minimum size and liquidity requirements

With that kind of profile, dividend aristocrats also have strong potential for capital appreciation. In a way, that qualifies them as both income and growth assets.

They can be purchased through an investment broker, though there are exchange traded funds (ETFs) that specialize in these stocks. The ETFs can also be purchased through investment brokers.

Real Estate Investment Trusts (REITS)

REITs are basically mutual funds for commercial real estate. A single REIT can hold dozens of properties, including apartment buildings, shopping centers, and office buildings. Like mutual funds, you can choose the specifics. For example, you can choose a fund that invests in properties located only in major metropolitan areas. You can also choose the fund based on the type of property held, for example, industrial warehouses.

Since REITs are legally required to payout at least 90% of their income to their investors in the form of dividends, they can be an excellent source of above average income.

REITs have produced annual rates of return of 9% over the past five years, which compares favorably to the return on stocks over the same period.

Dividend.com lists more than 200 dividend paying REITs, some of which pay over 10% annually. REITs can be purchased through investment brokers.

Peer-to-Peer (P2P) Lending

P2P lending platforms are where you can invest in loans made directly to borrowers. The loans are typically unsecured personal loans, used for an unlimited number of purposes. The interest rates are considerably higher than what capital preservation assets pay.

There are investors claiming steady returns of 10% or more on platforms like Lending Club and Prosper.

Naturally, an investment that pays at that level will involve a significant degree of risk. With P2P loans, there’s always the possibility of default. If so, you can lose some more all of the principal invested in any loan.

It’s best to use P2P loans as a small allocation in your income generating portfolio, that will increase the overall return. But due to the degree of risk, it should not comprise 100% of this asset allocation.

Comparing Income Generation Assets

Growth

High dividend stocks and REITs do have the potential to provide growth. But since their primary function is income generation they’re not specifically included in this category.

The primary growth-related investment is stocks. That’s because the average annual rate of return on stocks has been 10% since 1928. For this reason, stocks must be a major allocation in your portfolio.

Stocks can be purchased in one of three ways:

• Individual stocks
• Funds (mutual funds and ETFs)
• Robo-advisors

Let’s look at how each works, as well as the advantages and disadvantages that go with them.

Individual Stocks

With an investment portfolio $500,000, you can certainly invest in a portfolio of individual stocks, and still have plenty of funds left over for the other investments in this article. For example, you can allocate $200,000 toward $10,000 in each of 20 companies. That would give you diversification comparable to a mutual fund, but still leave you with $300,000 to invest elsewhere.

Individual stock advantages:

• You can choose the stocks you find most attractive, based on your own criteria.
• If you have a knack for picking stocks, you may be able to outperform funds.
• You may periodically identify a new or under-priced stock, that increases in value many times over the years.
• Investing in individual stocks works best for experienced investors, with a demonstrated track record of successful investing.

Individual stock disadvantages:

• You can suffer major losses if you lack sufficient investment skill.
• Trading fees can make owning individual stocks more expensive than other forms of ownership.
• You’ll need to investigate and evaluate each stock you purchase, then decide the right time to sell each.

Keeping your portfolio adequately balanced between various companies can be a certified nightmare.

Where to invest in individual stocks. Fidelity, Ally Invest and TD Ameritrade are all comprehensive investment platforms, designed for the self-directed investor. They also charge very reasonable trading commissions.

Funds – Mutual Funds and ETFs

A fund is a portfolio of stocks. A mutual fund selects what the fund manager believes to be the best performing stocks, in an attempt to outperform the market. But they have higher expense ratios than ETFs, and often come with a load fee between 1% and 3%.

ETFs are index-based funds. The fund is tied to an underlying index, like the S&P 500. These funds are considered passive investments, since they match the market, and don’t try to exceed it. But this is also why they have lower fees than mutual funds.

Fund advantages:

• No need to pick and research stocks.
• Funds provide built-in diversification.
• You can buy and sell funds just like individual stocks.
• You can invest in specific industry sectors, like IT, energy or healthcare.

Fund disadvantages:

• Very few funds ever outperform the general market, and never consistently when they do.
• Fees on mutual funds can be high, which will reduce your returns.
• There are now thousands of funds, making choosing the best ones as difficult as picking individual stocks.
• Funds can generate taxable gains even when the stock market is falling.

Where to invest in funds. You can buy, hold and sell funds with the same investment brokers where you can trade stocks. ETFs typically have the same trading commissions as individual stocks.

Mutual funds usually have higher commissions, as well as load fees and higher expense ratios than ETFs. But you can also purchase funds through fund families, like Vanguard, where no additional fees will be charged for trades.

Robo-advisors

At Autopilot Finances we like robo advisors, even for large portfolios. They can completely remove the job of picking individual investments, as well as managing them. This will be especially important if you don’t have much investment experience. A robo-advisor can handle the technical side of investing, while you concentrate on funding your account.

The robo-advisor phenomenon is not more than a decade old. Yet there’s already been a steady growth in both the number of robo-advisors, and the investment specializations they work with. But one fact is certain with nearly all robo-advisors, and that’s that they emphasize investing in stocks.

In most cases, stocks will be held through low cost ETFs. In a typical robo-advisor, your stock portfolio will be allocated across between six and 12 individual stock ETFs. This will give you broad exposure to the entire stock market, both domestic and foreign.

Betterment and Wealthfront are two general purpose robo-advisors, and the most popular in the industry. Each provides complete portfolio management an annual rate of just 0.25%.

We also like M1 Finance, because it offers an opportunity to pick the investments in your portfolio. Using an investment methodology they refer to as “Pies”, they offer either platform-designed pies, or you can create your own, using a mix of up to 100 ETFs and individual stocks. The platform will then fully manage each pie for you. What’s more, M1 Finance charges no fee for their service.

Comparing Growth Asset Options

Speculations

With an investment portfolio of $500,000 or more, you have the kind of capital to consider a limited number of investment speculations. With 90% to 95% of your portfolio invested in the assets above, you may want take a chance holding 5% to 10% in one or more speculations.

Speculating combines the potential for big gains with a high risk of loss, including total loss. Not all investors are willing to go that route, but we’re opening up this discussion in case it may interest you.

There are dozens of speculative investments, but we’re going to focus on three of the most common:

• Direct real estate ownership
• Real estate crowdfunding
• Precious metals and cryptocurrencies

Direct Real Estate Ownership

Real estate is generally considered to be a safe investment, at least with owner occupied residential property. But owning investment property directly has the potential to both provide incredible long-term gains, and also significant losses.

The most common way to invest in real estate is through the purchase of rental properties. The basic idea is you purchase the property and rent it out at what will hopefully be a monthly profit. After a few years, as the value of the property increases, and the mortgage balance declines, you can sell the property for a big windfall.

However, there are a few risks that could change that outcome:

• You may not be able to rent the property for enough to cover the monthly expenses. If so, you’ll be subsidizing your tenant(s).
• Tenants can degrade or even destroy the property.
• You can be sued by your tenant.
• The value of the property may not rise, and may even decline in certain market conditions.
• Individual properties are generally not very liquid.
• The property could develop a series of structural deficiencies that will force you to pour large sums of money into it on a regular basis.

The potential to make a lot of money with direct real estate ownership is high. But the list of potential negative outcomes above indicates how speculative it can be.

Real Estate Crowdfunding

Real estate crowdfunding is actually legally considered to be speculative investing. It’s for that reason that most real estate crowdfunding platforms require you to be an accredited investor. If you have $500,000 in investments, you may not qualify as accredited based on your net worth (which must be at least $1 million, not including your primary residence), but you may qualify based on a minimum annual income of $200,000.

If that’s the case, you’ll have your choice of real estate crowdfunding platforms to choose from.

But understand that this is a high-risk undertaking. Much like owning investment real estate directly, this is a true high reward/high risk venture. You’ll have a choice to invest in either high interest real estate debt, direct equity participation, or a combination of both. You may be investing in commercial buildings, like apartment complexes, or individual fix-and-flip deals.

The potential to earn more than you can with REITs is certainly there, but so is the potential to lose some or all your investment. You’ll also have to tie your money up for several years, as these investments are highly illiquid.

Still, if you want to invest in commercial real estate, there are several platforms to investigate. Examples include:

• Peerstreet
• Realty Mogul
• EquityMultiple

Precious Metals and Cryptocurrencies

There are all kinds of speculations, loosely referred to as “hard assets”. We’re going to focus only on precious metals and cryptocurrencies, since they’re probably the most common.

Gold and silver are mainly a play on fear. They tend to react well to crisis, particularly inflation, international instability, and lack of faith in paper currencies. They had an outstanding run in the 1970s, and then again in the early 2000s. Both were times of ongoing crisis.

But the problem with precious metals is that they tend to languish or decline during normal times. This is what creates the high reward/high risk combination that makes precious metals speculations.

You can own precious metals in bullion form, such as with coins and bars. You can also hold gold through an ETF, like the SPDR Gold Shares (GLD) ETF. There are also a number of gold-based mutual funds, however these are more about gold mining stocks than the metal itself. They can be extremely volatile, and hardly qualify as investments in the conventional sense.

Cryptocurrencies are a very new development, and poorly understood by the average person. But the investment potential stems from 2017, when the value of cryptocurrencies exploded. For example, the price of Bitcoin went from $960 at the end of 2016, to a high of well over $18,000 in December, 2017.

That kind of price action is bound to draw attention. However, more recently Bitcoin has fallen back to the $3,600 level. If you timed it perfectly, you made a fortune. If you didn’t, you got crushed.

But that’s the way it is with speculations, and that’s why any money put into them should be held at an absolute minimum.

Final Thoughts on Where Can You Invest with $500,000

As you can see, the investment options available with $500,000 are practically unlimited. More than anything else, it will come down to your asset allocation.

A hypothetical portfolio might look like this:

• Capital preservation, 15%
• Income generation, 30%
• Growth, 50%
• Speculations, 5%

But that’s just an example. Your allocation should depend on your own investment goals, time horizon, and risk tolerance. Invest some time determining what those are, and the best portfolio allocations for you will fall right into place. After that, it’ll just be a matter of deciding exactly how you’ll invest in each asset category. This article will help you do that.

Chris Pineson