How to Invest $1 Million

October 12, 2021

Got $1 million burning a hole in your bank account? Here’s how to invest $1 million—the smart way.

What would you do if you had $1 million?

It might seem like a far-off dream, but here’s the thing: if you invest carefully, you may well build up that wealth over time. And if you make it that far, you have to think about how to keep growing it. After all, the first $1 million is the hardest.

So, if you found yourself with $1 million, how would you invest it? Here’s how to invest $1 million, the smart way.

Identify What You Need the Money to Do for You

First, you need to plan ahead for that hypothetical future $1 million. Which means thinking about what you need the money to do.

By far one of the most common investing mistakes is to start investing without a clear understanding of your investing objectives. For example, if you want the money to fund your kids through college, you need liquidity. If you want the money to fund your retirement, you need the money to last. Those result in two dramatically different portfolios.

This directly influences your investment strategy, which makes it easier to stay disciplined even when the market gets volatile.

Pay Off Every Debt

Wait, aren’t we talking about investing?

Well, it’s impossible to talk about investing without talking about its inverse—debt. And if you find yourself possessed of $1 million burning a hole in your account, you’ll never have a better opportunity to pay off your debt.

Here’s the thing: debt is the opposite of investing. Compound interest also applies to debt, which means you can actually owe more money than you originally borrowed because your original debt compounds in the time required to pay it off. In other words, much like an investing account grows over time the more you add to it, debt grows over time the longer it takes to pay it.

If you have $1 million, paying off every last red cent of debt is the best investment you can make. That way, you can put all of your remaining income into saving and growing your money.

Max Out Your Retirement Savings Plan

About 52% of Americans have some form of investment in the market, primarily from their retirement accounts. And if you have $1 million, maxing out your retirement accounts if your first priority after canceling your debt.

If you have an employer-sponsored 401(k) plan, contribute to it as much as you’re allowed to, and use a service like Blooom to make sure you’re making the most of that money. If you don’t have a 401(k) plan through your employer or you work for yourself, open an IRA. Even if you already have a 401(k), you can (and should) own an IRA too.

No, it’s not as exciting as surfing the stock market, but trust us—your future self will thank you for it.

Max Out Your Emergency Plan

No, this one isn’t as exciting as surfing the stock market either. Here’s the thing: the typical American household has $5,300 in savings in a bank or credit union, but 40% of Americans are one missed paycheck away from poverty. This means millions of middle-class folks are liquid asset-poor, which means they don’t have enough money stowed to cope with even a brief disruption in income.

So if your emergency fund is more like crossed fingers, this is the moment to insulate it.

Ideally, your emergency fund should be able to cover at least six months or more of expenses. Look for an emergency fund account in a place that will make the money both liquid and insured, like FDIC-insured savings accounts with high yields.

Find the Right Split Between Stocks, Bonds, and Cash

And now, at long last, the fun stuff. But before you jump into the stock market, keep in mind that your portfolio, no matter how flush, should strike the right balance between asset classes.

For most investors, that means a cash position equivalent to at least six months of expenses (hello, emergency money). A cash position equivalent is a security meant for short-term investing, with high credit value and high liquidity. If the average retiree spends $3,800 per month, that means the average retiree household needs at least $22,800 in liquid cash on hand.

Assuming your investment account is worth exactly $1 million, you should have a cash position of just 2% to 3% out of your entire portfolio. The rest is stocks and bonds.

If you’re a young millionaire, you can reach for high-growth stocks. Older millionaires (closer to retirement age) should stick to more conservative stocks.

And a word to the wise: stop trying to time the market. Or at least, stop relying solely on market timing to earn investment income. Active investors try to peer into the future to time the market, passive investors let the market do the work, and smart investors do both.

Diversify, Diversify, Diversify

Last but not least, don’t forget the mantra of every successful investor: diversify, diversify, diversify.

The reality is that no matter how much capital you have, you’re going to be wrong some of the time. If your portfolio is diversified, you won’t take irreparable hits when you guess wrong, and you can still earn good returns even if one part of your portfolio is weak.

Your best bet is to craft a portfolio with a mix of conventional and alternative investments. Conventional investments are stocks, bonds, and cash. Alternative investments are pretty much everything else, and they have a low correlation to the stock market, which means that smart alternative investing can be a good hedge against stock market risk.

Let’s Invest $1 Million for Your Financial Success

Ready to invest in your financial success? With the right tools on your side, figuring out how to invest $1 million is that much easier.

Here at Masterworks, we think that the world of fine art investing should be accessible to everyone, whether you’re a millionaire or an everyday investor. So, we act as your art expert, partnering with Citi Bank and Bank of America to identify growing artist markets with the best potential for risk-adjusted returns. We buy the art, and then we make it available for members to purchase ownership shares, kind of like purchasing stocks. Then, when we sell the art, you get your dividends based on your ownership shares. Ready to make your money go further, whether it’s $100 or $1 million? Fill out your membership application today.

Masterworks is a fintech company democratizing the art market. Our investors are able to fractionally invest in $1mn+ works of art by some of the world's most famous and sought-after artists.