How to Invest Large Sums of Money

The prospect of investing a large sum of money can be both exhilarating and daunting. There’s a potential for significant wealth growth with the right approach, but there’s always risks involved. If you’re wondering how to invest large sums of money, start with assessing your risk tolerance and exploring different asset allocation strategies for your portfolio. Once you get a sense of what your goals are then it’ll be time to choose a strategy that gets you there.

A financial advisor can provide insights into how to get the most from your lump sum investments.

Strategies for Investing a Large Lump Sum of Money

There are several strategies when it comes to lump sum investing. Each carries its own set of pros and cons, and picking the right one depends on your specific financial goals, risk tolerance, and understanding of the investment market.

Dollar-Cost Averaging: Dollar-cost averaging, a form of regular systematic investment, involves investing a fixed amount of money at regular intervals regardless of the price. For instance, investing $1,000 every month in a mutual fund benefits you by letting you purchase more units when the price is low and fewer when it is high.
Lump-Sum Approach: A riskier, yet potentially rewarding strategy is the lump-sum approach. It is about investing the entire amount at once. This approach often benefits from the guidance of a financial advisor due to the high risk associated with market fluctuations.
Asset Allocation Planning: Asset allocation planning is a strategy for spreading your investments across different asset classes. It’s designed to protect against market volatility and mitigate risk through a diversified portfolio.
Market-Timing: Market-timing involves predicting market movements and acting accordingly. However, due to its complexity, market timing often fails to deliver what a passive index fund delivers for all but the most savvy of investors.
Working With a Professional: To better understand different investment strategies and their implications, working with a wealth manager or financial advisor can be profoundly beneficial. They can provide personalized guidance to meet your financial goals and risk tolerance, helping you create a robust investment plan.

What You Can Invest a Lump Sum In

When it comes to investing your lump sum, there is no shortage of options. Ultimately, you’re weighing your goals against different risk levels and timelines. In general, the safer the investment the lower the return.

Bonds: Bonds are essentially loans to a company or government. In exchange for your investment, you receive regular interest payments. Note that the return of the principal at maturity is not always guaranteed.
Mutual funds: Mutual funds can provide balance in your portfolio as they are often a strong long-term investment. Broad mutual funds can bundle multiple investments across multiple industries for more stability. Many mutual funds have a focus area, like ESG investing, so it could benefit you to invest in multiple funds.
ETFs: Exchange-traded funds (ETFs) are similar to mutual funds as you can invest in multiple stocks at once. Many ETFs track an index but can provide a good amount of balance that you seek.
Real Estate: You can invest large amounts of money directly into real estate investments that can grow in value over time. You also might be able to invest in properties that can return income throughout your investment hold period in the form of rent from tenants.

How to Manage a Windfall

Man watching his large sum investment grow.

Coming into a windfall of cash, whether through an inheritance, work bonus, legal settlement or even a lottery win, can be life-changing. But without a clear plan, it’s easy to make decisions you might regret later. Here are some smart steps to take:

Start with the basics. Before you consider investing, prioritize financial stability. Pay off any high-interest debt, such as credit card balances or personal loans, and ensure you have a robust emergency fund. An emergency fund should typically cover three to six months’ worth of expenses, often set aside in a high-yield savings account.
Consult the experts. A windfall can carry legal, tax and financial implications. Hiring a qualified financial advisor can help you develop a long-term investment strategy. Inheritances or settlements may also involve legal considerations, so working with an estate attorney or tax professional is a smart move. These experts can help you understand reporting requirements, tax obligations and other strategies to protect your new assets.
Be cautious with friends and family. It’s common for people who receive a large sum to feel pressure to give or lend money to loved ones. Before making any financial promises, take time to assess your full financial picture. Creating boundaries and sticking to a written financial plan can help you avoid making emotionally driven decisions that may compromise your long-term security.

Tax Implications of Investing a Large Sum

Investing a significant amount of money can affect your tax bracket, sometimes in ways that aren’t obvious upfront. It’s important to know how different accounts and asset types are taxed so you can preserve more of your gains.

Understand capital gains taxes. If you invest in assets like stocks, mutual funds or ETFs in a taxable brokerage account, you’ll owe capital gains taxes when you sell at a profit. Short-term gains (for assets held less than a year) are taxed as ordinary income, while long-term gains are taxed at preferential rates. Timing your asset sales and holding investments longer can significantly reduce your tax bill.
Use timing strategies to minimize taxes. If you’re investing over time, you may benefit from strategies like tax-loss harvesting, which involves selling underperforming investments to offset gains elsewhere. Alternatively, consider investing during the tax year when your income may be lower to potentially benefit from reduced tax brackets.
Take advantage of tax-advantaged accounts. Where you invest matters just as much as what you invest in. Tax-deferred accounts like traditional IRAs or 401(k)s allow your investments to grow without immediate tax consequences, though you’ll pay taxes upon withdrawal. Roth IRAs, on the other hand, allow for tax-free growth and withdrawals if certain conditions are met. Using these accounts strategically can help reduce the overall tax drag on your portfolio.

Bottom Line

Man showing his friend how his large sum investment is doing.

The secret to successfully investing large sums lies in a clear understanding of your financial goals, a well-planned investment strategy and a keen awareness of potential risks. We can’t emphasize enough the importance of either conducting your own extensive research or consulting a financial advisor in order to build a personalized investment plan.

Tips for Investing

Whenever you want to see great returns over a long period of time, regardless of how much money you’re investing, you may want to work with a financial advisor. They can provide unique insight and help that you just won’t have on your own. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
One of the best tools to help you in your investing efforts is SmartAsset’s investment return calculator. You can estimate what your investments might look like over time.