How to Invest 50k USD Wisely in 2020 -Best Ways to Invest Money

Fifty thousand dollars is a large amount of money. Especially when it’s your very own hard earned cash. For a lot of people, $50,000 is worth an year’s salary, for many, it’s more than an year’s salary.

One of the key factors associated with investing money, is knowing how much money you have to invest.

If you have ten thousand dollars to invest, your wiggle room is lesser and you can’t afford to lose much, and you should invest accordingly.

But if you had a large amount, say $500,000, you’d probably want to spread your investment wings into different investment classes, maybe even including some speculations.

If you have a portfolio of that size, you need to make some key and crucial decisions about it. Of course it isn’t enough to help you pump your money all over the investment classes, but it definitely warrants an upgrade from the proverbial ‘cookie jar’. 

So how do you invest $50K? Let’s look at that question with your whole life in mind.

How to Invest 50,000 USD Wisely -Best Ways to Invest Money

Invest in a Blog

A recent, growing trend in the field of investment is investing in blogs. The growing popularities of blogging sites have made more and more investors look towards web properties to put their money in. With the world turning more and more towards digital content, blogging sites hold a lot of money making potential. The only way is up and blogging sites can make investors some real money.

Popular opinion classifies income from blogs as a type of passive income.  However, that’s not necessarily the case, especially at the beginning. However, if you invest in a blog that already earns consistently, you can just outsource the maintenance and upkeep and just enjoy the consistent influx of income. 

A blog/website can be treated as an online version of real estate. But unlike real estate, you don’t need a large amount of money to invest. A blog can start giving great returns on a small scale investment as well, and it’s the right medium to invest in, especially considering the times we live in.

Invest Cash in a money market account

When you have $50k in your hands for investment, your emergency fund is going to gobble up a large chunk of the portfolio. In case you keep $7,500 aside for emergencies, it still takes up 15% of your total investment portfolio.

In that situation, you might consider investing most or even all of the rest of the portfolio – $42,500 – entirely in stocks, using the emergency fund to represent the cash/bond allocation. But again, it all depends on your own risk tolerance.

That will provide you with cash to make new investments, particularly after a market sell-off when you might be able to scoop up stocks at bargain prices.

Your actual stock portfolio always benefits from some additional cash in it. About 5-10% of your investment portfolio should consist of liquid cash. So your $50,000 portfolio should have between $2,500 – $5,000 in liquid cash.

Cash held within the investment portion of your portfolio itself should be held in a money market fund. That will enable you to earn a little bit of interest while you keep the money completely liquid in case a buying opportunity comes up.

In bull markets, you want to be on the lower end of that range, and at the higher end during bear markets. The basic ideas the build cash in declining markets to buy stocks at a discount, but to be more fully invested in stronger markets.

For most small investors, the best way to invest in bonds is through bond funds. You can invest in funds that specialize in each of the above bond types, or you can even invest in a bond fund that holds all of them at the same time.

Invest in Stocks

As far as investment options go, stocks are probably the most exciting, and most dangerous. Up to this point, the investments that we’ve been discussing – cash and bonds – are about capital preservation. Every investor needs at least some of those types of investments. In those options, the investment never loses its value over time. It might increase slowly, but it will never reduce in value.

On the contrary (sort of), stocks are about increasing the value of your investment, or capital appreciation. With capital appreciation comes the risk of loss – and that’s why we spent so much time on capital preservation investments.

But let’s focus on discussing stocks here. Just as is the case with bonds, there are all different types of stocks. There are common stocks and preferred stocks.

There is also what is known as “sector” stocks, such as energy, natural resources, technology, healthcare, and emerging markets.

For most small investors, the best way to invest in stocks is through funds. And more specifically, index funds.

The benefit of index funds is that they are invested in an actual index of stocks, such as the S&P 500. That gives you the broadest possible market exposure, without taking on the specific risks of loading up in a small number of stocks or a limited number of sectors.

The other advantage of index funds is that they are typically held through exchange-traded funds, or ETF’s. These are low-cost, no-load funds that don’t trade actively. For that reason, they’re perfect for the buy-and-hold type of investing, which is what you should be doing as a long-term investor.

With index funds, you don’t have to try and outguess the market, or spend a lot of time working on investment selection or portfolio rebalancing. Hence you will be better off if the bulk of your portfolio is made up of index funds.

If you feel comfortable doing so, you can allocate a very small percentage of your stock portfolio to certain individual stocks. The general rule here is that you should invest only with money that you can afford to lose.

Individual stocks are subject to all kinds of risks, including industry shifts, regulatory changes, and competition. That makes them much riskier than index funds, and that’s why they should only be a small slice of your stock allocation.

An option to consider if you don’t feel comfortable selecting and managing your own investments is using a robo-advisor platform.

They’ll determine your risk tolerance for you, then design a portfolio for you. All of the management of your portfolio will also be handled by Betterment, including portfolio rebalancing and dividend reinvesting, giving you a fully automated, professionally managed, hands-off investment portfolio.

All you’ll need to do from that point on is fund the account.

Invest in a CD (Cash Deposits)

Where should you invest your emergency fund? That’s the point – you shouldn’t. An emergency fund shouldn’t be held in anything riskier than money market funds or very short-term certificates of deposit.

You need to concern yourself with safety of principal, as well as liquidity in an emergency. CD interest rates are on the rise, and you’ll be hard pressed to find a safer place with comparable returns to stash your emergency fund.

While you won’t be able to touch your money without penalty before a certain date, CD terms are flexible. You can choose a 6-month CD or a 5-year one, whatever fits your needs best. 

While that limited access might seem frustrating, it’s a great deterrent that can help you avoid dipping into your emergency fund without good reason. A short-term CD is also a great place to store your money while you’re determining how you plan to invest it.

Determine your investment allocation

There are a lot of theories when it comes to developing an investment portfolio, but there really are no hard rules. An old and extremely useful tip is to invest 100 minus your actual age in stocks. It’s useful and easy since it is very easy to calculate.

For example, if you are 35 years old, then 65% of your portfolio should be invested in stocks (100 – 35). If you’re 65, then 35% of your portfolio should be invested in stocks (100 – 65), and the balance in bonds and cash.

The calculation enables you to have a higher stock allocation when you are younger and have a longer investment time horizon, and a lower stock allocation as you get toward retirement, and should have less risk.

More recently, the thinking is that 100 minus your age produces an investment portfolio that’s too conservative. To accommodate for that, the base number is has been increased from 100. Something like 125 minus your age is closer to the new standard.

As per the new standard, 35 year olds should have 90% of their portfolio invested in stocks (125-35). By the same method, 65 year olds should have 60% of their portfolio invested in stocks (125-65). 

This method of calculation is extremely useful. However, you should also be able to adjust as per personal factors. For example, if your income is less stable, you might want to have a lower stock allocation. But if your income is very stable, then you could probably afford a higher stock allocation.

You should also adjust your allocation for your own personal risk tolerance. If you find losing money in your portfolio to be especially stressful, then you might want to keep your stock allocation lower than what is recommended. But if stress doesn’t bother you, can go even higher.

Stock up your emergency funds

Regardless of the size and scope of your investment portfolio, you should definitely have an emergency fund. The main purpose of the fund is to ensure that you have sufficient liquid cash available to see you through situations such as an unexpected major expense (high hospital bill) or a temporary halt in your income source (in the case of layoffs, firings or sabbaticals). 

One of the primary functions of an emergency fund from an investment standpoint is that it creates a financial separation between you and your investment portfolio.

Having an emergency fund keeps you from having to liquidate your investments in order to cover emergency expenses.

For example, let’s say that you decided to invest 100% of your money – meaning that you decide to forego having an emergency fund. What happens in that situation when an emergency actually happens?

For example, let’s say that you decided to invest 100% of your money – meaning that you decide to forego having an emergency fund. What happens in that situation when an emergency actually happens?

There are two outcomes, and neither of them is likely to end well:

Either you will use a credit card, or

You will be forced to liquidate investments.

The credit card route has the potential to put you in a situation where you will be paying more in interest on your debt than you will be earning on your investments.

But if you are forced to liquidate investment positions, you might sell off investments at a profit, and that will create a tax liability. In case you sell your losing positions off, you will unfortunately be locking those losses permanently. 

An emergency fund keeps both of those scenarios from happening. The conventional wisdom is that you should have at least three months of living expenses if you are salaried, and six months if you are either commissioned or self-employed.

If you are salaried, and you need $2,500 per month to cover your living expenses, then the first $7,500 of your $50,000 portfolio should be held in your emergency fund.

Invest in bonds

What’s the purpose of investing in bonds? Historically, they’ve acted as a counterbalance to stocks. While stocks have the potential for higher returns, due to capital appreciation, bonds add stability to your portfolio.

They do this through a combination of predictable interest payments, as well as a guarantee of full repayment of your investment principle.

That arrangement has been weakened in recent years. Very low-interest rates have made bonds less rewarding than stocks. That has a lot to do with the rule of 100 minus your age being replaced by 125 minus your age.

The second rule allocates more money to stocks and less to bonds and cash. That situation could change if interest rates rise substantially, and that’s why we need to talk about bonds.

If you have a fully stocked emergency fund, plus some cash with your stock portfolio, you may or may not want to invest in bonds.

Even using the more conservative rule of 100 minus your age, if you are 35 years old then 65% of your portfolio will be in stocks, and 35% will be in the bond/cash combination.

But if you have $7,500 in your emergency fund and another $2,500 in cash for your stock portfolio, that will cover 20% of the cash/bond allocation. If you wanted to invest 35% in a combination of cash and bonds, that would leave you with 15%, or about $7,500, to allocate toward bonds ($50,000 X 15%).

It really is difficult to diversify into individual bonds when you only have a few thousand dollars to invest in them. There are different kinds of bonds – convertibles, corporates and municipals. 

Sample investment portfolio for $50k

To wrap up all the information that we have provided in this post, here’s a summary of what this portfolio might look like. Keep  in mind that this portfolio will vary based on your personal circumstances and preferences.

If you’re 35 years old and willing to invest $50k, a portfolio like this will suit you:

Emergency fund – 3 months living expenses in bank assets – $7,500 (15%)

Cash in your stock portfolio – money market funds – $2,500 (5%)

Bonds – bond funds – $7,500 (15%)

Stocks – index funds – $32,500 (65%)

Total – $50,000 (100%)

A spread like this will give a 35 year old a portfolio with good capital preservation and appreciation. You can get a lot of different types of advice from different people, but the basic idea remains the same i.e. making a portfolio to help you reach your financial goals. Such a portfolio will also accommodate for the unexpected events in life and keep you financially safe as ‘life happens’. 

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