What is best way to invest $200K?

Image source: Roderick Eime

Question: What is best way to invest $200K?

  – asked by Oscar Anand

My 401(k), life insurance is already covered. I would like it to be $1 million in 5 years.I will add $5K per month addition for next 5 years.Also I would like to retire in 10 years with $80K income from this. What are investment options to grow this amount without too much personal time?

Response:

Investing is a long-term proposition. The magic of compounding doesn’t really kick in until after 10, 20, 30 years or more. Trying to turn your $200K initial investment along with an additional $60K a year into $1 million in five years is likely unrealistic. That initial investment of $200,000 along with the $5,000 monthly investment that you expected to make would necessitate a compounded annual growth rate of 18.6%.

If you were to invest in the stock market, here’s a table with expected returns over time based upon various potential annual rates of return.

After ten years, with just a 4% return, you can have that million dollars that you are seeking, but expecting it after just five years is unrealistic.

An investment in the S&P 500 index fund has returned 9.70% annually over the past 50 years. That said, that’s a long term return. There are years when you might lose money. Remember back in 2008 when the S&P lost 37% of its value. It has long since made up that decline and then some, but expecting to receive that annualized 9.7% from the S&P 500 over a short five year time-frame too is unrealistic.

If long-term bonds were paying 4%, you could get there in ten years, but today, the 30-year US Treasury is only paying about 3%. Perhaps with interest rates expected to rise, you might see 4% in the somewhat near future. But the 10-year is only paying 2.3% right now. That likely won’t come close to 4% anytime soon.

Sorry, I can’t offer you a reasonable path to your goal. I believe your expectations need to be tempered.

Follow up

After receiving this comment: “Thank you. This is very insightful. I am moving my goal to 7 years.”

You are welcome. After 7 years, assuming the S&P 500 returns 9.7%, you would have $1 million. As I mentioned before, that 9.7% historic annualized return (which includes dividends) is based on long term performance. Anticipating such a return in any short term period is gambling. You may accomplish your goals, you may not. Remember, just nine years ago, the market lost 37% of its value.

 

 

originally posted at Quora

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