To many people, $200k is a life-changing amount of money. Perhaps you’re well aware and in desperate need of advice regarding how to invest a $200k inheritance wisely. Or maybe you’ve saved that much money over the course of several years and would like to do something with it.
Whatever the case may be, keep reading as I share some options and tips for evaluating them. In this article, you’ll learn:
- what investment options exist when you’ve got $200k
- how you might safely and reliably approach turning $200k into millions of dollars
- ways to think about (and mitigate) risk when you’re investing $200k
How to invest $200k: Some ground rules
Before we jump into investment options, it’s worth establishing some ground rules.
Rule #1: I’m not a financial advisor
If you have $200k to invest, consult a licensed professional before settling on any particular investment. This article is merely your chance to proactively read about some of the options a professional will likely present to you.
Rule #2: The wrong approach can burn $200k FAST
While $200k is certainly a lot of money, it’s not a bulletproof amount. You’re still only one or two bad financial decisions away from turning it into significantly less (or even nothing).
Deep down, most people know this. After all, $200k couldn’t even buy a house in many North American cities these days. We tend to lose our sense of scale when presented with so much money at once, though. You might feel like you never have to worry about money again with $200k in cash. But you still need to play your cards right.
Rule #3: Time is your friend when investing $200k
While $200k isn’t enough to keep you from ever worrying about money again, it can certainly become such with the right investment strategy and enough time.
That second part (time) is key. If you’re looking for advice on turning $200k into $1 million by next week, this article isn’t for you. Most of these strategies won’t turn $200k into millions for at least a few years – and sometimes even decades.
There’s a reason I don’t recommend (or even really talk about) get-rich-quick schemes. It’s that I want you to actually become rich. Most people who throw money in Dogecoin or other fads end up losing bigly. The only reliable, proven methods for turning $200k into millions involve time and compound growth. Anything else is gambling and will likely lead to you fumbling the great opportunity you have as the owner of $200k.
How to invest $200k: 5 smart options
1. Index funds
I’ll cut to the chase and start with the strategy I believe should work for the vast majority of people given how simple and straightforward it is: index funds.
Index funds, if you’re unfamiliar, are baskets of stocks grouped together based on a particular theme. For example, you can find index funds modeled after the S&P 500, which is a collection of America’s largest 500 companies. According to CNBC, Warren Buffett (arguably the most successful stock picker of all time) even instructed the trustee of his estate to move 90% of the money he leaves behind into an S&P 500 index fund.
Pros of investing $200k in index funds
- Simplicity: This is the big advantage of investing in index funds. With a single asset, you can assemble and maintain a well-diversified portfolio. So if you’re looking for a way to park your $200k in the stock market for 10 years or more and hardly ever think about it, index funds are hard to beat.
- Performance: Indexes have performed quite well throughout history. In fact, very few stock pickers (including those managing mutual funds) have been able to beat the S&P 500 over the long haul. So not only will you have an easier time investing through index funds than choosing your own stocks; you’ll also likely make more money.
- Low fees: Index funds also carry low fees. This is a major contributor to their stellar performance. Lower fees mean more of your money is left to grow rather than being gobbled up by advisors.
- Liquidity: Another advantage of index funds is their liquidity. If you ever decide to withdraw your money and allocate it elsewhere, you can usually do so within a day or two.
- Accessibility: Lastly, it’s quite easy to get started investing through index funds. If you bank with a major financial institution in North America, chances are they offer index funds and have advisors that can guide you along. You can even hold index funds in a variety of tax-advantaged accounts at these institutions. If you live in the United States, click here to see a list of popular account types.
Cons of investing $200k in index funds
- Lack of control: If you’re adamant about maintaining full control over your investments (down to the individual stocks), you may have a hard time with index funds. You’re basically choosing an index and leaving the details up to whatever assets fall into that category.
Note: I’d argue that – given the aforementioned fact that indexes produce far better returns than active investors – this is actually for the best. Control over every detail of your investments is arguably the last thing you want. Still, some people swear by staying in control, and that’s understandable.
2. Mutual funds
Mutual funds are baskets of assets grouped together by financial institutions. As an investor, you can claim a slice of this basket by investing in the fund.
Sound familiar? That’s because index funds are technically mutual funds. However, while index funds track indexes (go figure) such as the S&P 500, most investors use the term “mutual fund” to describe actively managed baskets of assets. This means that behind a mutual fund, there are actual humans picking assets they believe will perform well.
Pros of investing $200k in mutual funds
- Popularity: Mutual funds are among the most popular investments in the world. While this may not seem like much of a perk, it can be if you lack confidence as an investor. Lacking confidence, after all, can be devastating when you’ve got $200k on the line.
- Simplicity: For all intents and purposes, mutual funds don’t differ much from index funds structurally speaking. With a single investment, you’ll own hundreds (sometimes thousands) of different assets.
- Liquidity: The process of selling a mutual fund (and the speed with which you can do so) is identical to that of liquidating your shares in an index fund. With most providers, it takes a couple of business days at most to cash out.
- Accessibility: Once again, as with index funds, you can purchase shares in mutual funds through most major consumer banking/investment institutions in North America.
Cons of investing $200k in mutual funds
- Fees: According to The Balance, mutual fund fees can climb as high as 1.14% annually on average, depending on the type of fund you choose. On a balance of $200k, that’s $2,280 you’ll pay in fees each year. Over time, that can have a significant impact on your balance.
- Subpar performance: As I mentioned previously, actively managed mutual funds typically lag behind passive index funds when it comes to performance over the long haul. If you’re starting with $200k, this could translate into you having tens of thousands of dollars less with mutual funds than if you choose index funds instead.
- Lack of control: As with index funds, you have no say over the assets underlying your shares in a mutual fund. You’re leaving those decisions up to the manager.
A robo-advisor is an algorithm that automatically assembles and maintains an investment portfolio based on the criteria you feed it (i.e. your risk tolerance). This is how I invest my money. I use a robo-advisor called Wealthsimple, which purchases exchange-traded index funds on my behalf and rebalances my portfolio as needed.
Pros of investing $200k via a robo-advisor
- Simplicity: Investing via a robo-advisor is no more complicated than investing in index or mutual funds. Just transfer your money to the account and the robo-advisor will handle everything (including rebalancing) for you.
- Performance: Because robo-advisors typically invest passively in indexes, your returns will closely follow those of the underlying indexes (minus fees). As you’ll recall from earlier, these returns are typically greater than what you’d find with mutual funds or active trading.
- More control than with index and mutual funds: With a robo-advisor, your portfolio’s makeup depends on your inputs. When you sign up, the robo-advisor will prompt you for information (i.e. your risk tolerance and time horizon). You can subsequently adjust this information to change your portfolio’s composition if needed.
Cons of investing $200k via a robo-advisor
- Fees: When using a robo-advisor, you’ll pay a fee on top of the expenses already charged by the underlying assets. With my robo-advisor (Wealthsimple), I pay a fee of 0.4%. It’s not exorbitant but it’s still worth acknowledging.
4. Real estate
In many parts of North America, a nest egg of $200k leaves you with more than enough for down payments on a couple of properties. You can subsequently collect rental income and likely benefit from the property’s appreciation in value.
Pros of investing $200k in real estate
- Growth potential: If you’re wondering how to invest $200k and become a millionaire, real estate is an interesting proposition. As David Greene points out in this Forbes article, real estate produces wealth more consistently than most other asset classes. The key is leverage. If you invest your $200k in the stock market, you’ll benefit from a portfolio worth $200k. If you use it as a down payment on portfolios, meanwhile, you might be able to benefit from a $1 million portfolio.
- Cash flow: A single rental property could generate thousands of dollars in income for you every month. Even after subtracting your costs, you may receive hundreds of dollars in profit monthly. Not bad, especially if you own several rental properties!
- More control: Many real estate investors like that they have more control over their properties than they would with index funds. They can make upgrades that increase the home’s value, for example.
Cons of investing $200k in real estate
- Leverage has major potential downsides: Leverage can work against you in real estate as well. For example, imagine you put $20k down on a $100k property. The economy subsequently takes a turn for the worst and your property becomes worth just $60k. Suddenly, you owe more money than you invested in the first place.
- Real estate is not a passive investment: Of all the ways to invest $200k I’ve mentioned thus far, real estate is easily the most labor-intensive. You’ll need to find the right tenants, handle property maintenance, and more. While you can hire people to handle all of this for you, that will eat into profits.
5. Purchasing an existing business
Another way to invest $200k would be to purchase a small to medium-sized business. You may be able to buy one outright with that kind of money (particularly if the business is online) but at the very least, it would be enough for a down payment on something promising.
Pros of investing $200k by purchasing an existing business
- Control: You’ll be able to make decisions regarding how your company is run. These decisions will, in turn, have a direct impact on your financial situation. Some people find that level of control thrilling.
- Wealth generation potential: According to a Best Wallet Hacks analysis of Federal Reserve data, the wealthiest taxpayers earn a significant portion of their money through businesses they own. This isn’t a coincidence; a successful business can generate insane amounts of capital.
Cons of investing $200k by purchasing an existing business
- Risk: This is arguably the riskiest idea on this entire list. Businesses fail all the time. Unless you have significant expertise (or are prepared to lose all of your investment in exchange for it), think twice about purchasing a business.
- Amount of time required: While smart entrepreneurs develop systems and teams that improve efficiency, this takes time – especially if you’re buying your first business. Be prepared to add another full-time job’s worth of tasks to your plate for at least a few months.
Keep in mind – none of these ideas are mutually exclusive!
I hope the list above has given you some ideas regarding how to approach investing $200k. Every single strategy I’ve mentioned has the potential to generate significant returns if you approach it wisely.
Keep in mind – you can also combine strategies! With $200k, you have enough money to build a serious portfolio with multiple asset classes. I’d recommend speaking with an advisor and formulating the right plan based on your needs and goals.
Check out my other articles on the topic of financial planning here.