Individuals with $100,000 in liquid funds have a wide variety of investment options.
Choices of asset classes, instruments and maturities will likely vary depending upon an individual’s circumstances. These include the investor’s age, risk profile and time horizon.
Risk tolerance is usually lower when there are short-term liquidity needs. Conversely, a longer time horizon provides more flexibility – including the potential to better absorb short-term losses. Additional factors influencing risk tolerance are an individual’s current and future liabilities, the amount of total investable assets, their income and family status. Aside from the ability to take risk, an investor can also be constrained by their willingness (or lack thereof) to take risk.
To give a practical example, a long-term time horizon can allow to seize on growth-oriented public stocks, or private equity opportunities, while an investor with a shorter time horizon is more likely to invest in high-yielding certificates of deposit, high-interest savings accounts and other fixed income products in order to maximize liquidity.
As high-interest debt can be a drag on wealth growth, some of the cash can be used to – for instance – pay off credit card debt, which yields close to 20% on average.
While at times exciting and fulfilling, amateur equity research – which is required to make stock selections – can be time consuming and is seldom remunerative for an individual investor, unless the investor is also a finance professional. Several companies offer access to research, as well as platforms to do “day-trading,” but do-it-yourself investors are at risk if they do not understand market dynamics, which can be the case even among the well educated. On the other hand, while less exciting, passive investing – usually through investments into diversified funds such as ETFs or mutual funds – is less expensive, and historically leads to positive returns in the long term.
Two of the most prominent ETFs track the S&P 500 and the Dow Jones Industrial Average, although there are many different indexes tracking other areas of the market. Securities are added and subtracted from funds based upon a set of parameters determined by a fund manager.
As mentioned previously, different investment vehicles entail different degrees of risk. Strictly speaking, the degree of risk considered acceptable should be dictated by the overall investment goal.
The most common opportunities include:
Savings accounts are backed by the Federal Deposit Insurance Corporation up to $100,000, but offer paltry returns. High-interest savings accounts , money market accounts, and certificates of deposit can offer better returns, though with some liquidity constraints. .
Mutual funds, exchange-traded funds (ETFs) and index funds invest in a selection of public equity instruments chosen by a fund manager. This method provides investors with diversification and the advantage of a professional guiding the fund. Investors are tasked only with selecting the funds reflective of their specific investment themes – for instance, they could choose a growth ETF, a dividend ETF, and so on.
Exchange traded funds are grouped like mutual funds, but are bought and sold like publicly traded stocks. Associated costs are usually lower than those encountered with actively managed mutual funds.
There is widespread illusion among investors that a large allocation to a single company with high growth potential can lead to outsized returns. Individual stock picks can however be extremely risky, as traditional financial theory states that an investor is never compensated for unsystematic risk1.
Real estate, private equity, venture capital, digital assets and collectibles are among the asset classes designated “alternative investments.” While they are hard to define, broadly speaking they tend to be less correlated with public equity, and thus offer potential for diversification. These assets were traditionally accessible to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums – often between $500,000 and $1 million.
Yieldstreet was founded with the goal of dramatically improving access to alternative assets by making them available to a wider range of investors. While traditional portfolio asset allocation envisages a 60% public stocks and 40 percent fixed income allocation, a more balanced 60/20/20 or 50/30/20 split may make a portfolio less sensitive to public market short-term swings. In addition to that, by being a one-stop-shop platform for alternative investments, Yieldstreet aims to offer the opportunity to diversify, crucially, within the private market space.
Learn more about the ways Yieldstreet can help diversify and grow your portfolio.
1 Unsystematic risk is diversifiable and thus, in traditional financial theory, uncompensated. https://www.investopedia.com/terms/u/unsystematicrisk.asp
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.