MONEY Investing

13 Things to Do with $100,000 Now

domino stacks of $10,000 bills
Ralf Hettler—Getty Images

Oh, if only six figures landed in your lap tomorrow. Hey, you never know. In case it does—or in case you're lucky enough to have 100 grand put away already—you'll want to have these smart moves in your back pocket.

1. Say “yes” to a master
Unless you live in one of the few areas where the real estate market hasn’t come to life, the decision of whether to move or improve is likely tipped in favor of remodeling, says Omaha appraiser John Bredemeyer. A new bedroom, bath, and walk-in closet may cost you $40,000 to $100,000. But it’s unlikely you’d find a bigger move-in-ready abode with every­thing you want for only that much more, especially after the 6% you’d pay a Realtor to sell your current home.

2. Burn the mortgage
If you’re within 10 years of retiring, paying off your house can be a wise move, says T. Rowe Price financial planner Stuart Ritter. You’ll save a lot of interest—$24,000, if you have a $100,000 mortgage with 10 years left at 4.5%. Eliminating the monthly payment reduces the income you’ll need in retirement. And as long as you’re not robbing a retirement account, erasing a 4.5% debt offers a better return than CDs or high-quality bonds, says Ritter.

3-5. Buy a business in a box
One hundred grand won’t get you a McDonald’s (for that you’ll need 10 or 15 friends to match your investment)—but there are a number of other good franchises you can buy around that price, says Eric Stites, CEO of Franchise Business Review. Here are three that get top raves in his company’s survey of owners:

  1. Qualicare Family Homecare (a homecare services firm)
  2. Window Genie (a window and gutter cleaning service)
  3. Our Town America (a direct mail marketing service)

6. Tack another degree on the wall
On average, someone with a bachelor’s degree earns $2.3 million over a lifetime, vs. $2.7 million for a master’s and $3.6 million for a professional degree. The payoff varies by field: In biology a master’s earns you 100% more, vs. 23% in art. So before applying, find out how much more you could earn a year, research tuition, and determine how long it’ll take you to recoup the investment.

7. Make sure you won’t be broke in retirement
More than half of Americans worry about running out of money in retirement, Bank of America Merrill Edge found. Allay your fears with a deferred-income annuity: You pay a lump sum to an insurance company in exchange for guaranteed monthly payments starting late into retirement. Because some buyers will die before payments start, you get more income than with an immediate annuity, which starts paying right away. A 65-year-old woman who puts $100,000 into an annuity that kicks in at age 85 will get $3,500 a month, vs. $600 for one that starts this year. In the future you could see deferred annuities as an investment option in your retirement plan; the Treasury Department just approved them for 401(k)s.

8. Get a power car that runs on 240v
For just over $100,000 (after a $7,500 tax rebate), you can be the proud owner of an all-electric Tesla Model S P85, with air suspension, tech, and performance extras. Yes, that’s a pretty penny. But you’ll help the planet, eliminate some $4,000 a year in gas bills—and get a ride that gets raves. “The thing has fantastic performance,” says Bill Visnic of Edmunds.com. It goes from 0 to 60 in 4.2 seconds and drives 265 miles on a charge, which requires only a 240-volt outlet.

9-12. Put hotel bills in your past
Think you missed the window on a vacation-home deal? True, the median price has jumped 39% since 2011, according to the National Association of Realtors. “But while you can’t buy just anything, anywhere, for 100 grand anymore, there are still decent deals out there in appealing ­places,” says Michael Corbett of Trulia.com. Here are four markets where the price of a two-bedroom condo goes for around that amount:

  • Sunset Beach, N.C./$96,000
  • Fort Lauderdale/$116,000
  • Colorado Springs/$117,000
  • Reno/$117,000

13. Tone up your core
The average American saving in a 401(k) has nearly $100,000 put away ($88,600, to be exact, according to Fidelity). With this core money, you’re likely to do better with index funds vs. active funds, says Colorado Springs financial planner Allan Roth. “The stock market is 90% professionally advised or managed, and outside Lake Wobegon, 90% can’t be better than average.” His three-fund portfolio: Vanguard’s Total Stock Market Index, Total International Stock Index, and Total Bond Market.

Related: 35 Smart Things to Do With $1,000

Related: 24 Things to Do with $10,000

Tell Us: What Would You Do With $1,000?

MONEY

Tell Us: What Would You Do With $1,000?

$1000 bill
Travis Rathbone

See how other readers would use a grand—then share your own grand ideas by tweeting with the hashtag #ifihad1000.

In coming up with 35 Smart Things to do with $1,000, MONEY put the question out to our readers via Facebook: What smart—or not so smart—thing have you done with that amount of money? What would you recommend someone else do with those funds? Or, what would you do if by some amazing stroke of luck, a grand fell magically into your lap today?

Some of your answers follow, but we’ll also be adding to this post in the next few days. So you still have a chance to share your money move, be it spending or saving, in earnest or good fun. Share your $1K fantasy with us on Twitter, using the hashtag #ifIhad1000.

“The first thing anyone should do before investing $1000 is to pay off revolving credit (credit cards) that’s a 15% to 20% return.”
—Danny Day
……….
“For a $1000, I purchased Bank of America stock.”
—Natalie TGoodman
……….
“It’s all about goals. Fund an emergency savings account, pay off debt, fund a retirement plan at least up to the employers match, pay down/off mortgage, save for college, etc. Needs before wants.”
—Nereida Mimi Perez Brooks
……….
“$1,000 would go into my money market as it really isn’t that much.”
—Paul Mallon
……….
For about $1,000 we purchased a last-minute 5-day Bahamas cruise for our family of four during the off-season month of September.”
—Marc Hardekopf
……….
“Put it in a casino and it doubled.”
—Norma Sande
……….
“I was given $1000 from my grandpa when I went to college. I started trading stocks in ’10 and made about $10,000 from it. Then in 2011 I bet it all on one stock with no stop loss, and it crashed overnight when the FDA shut them down. Lost 90%.”
Jaycob Arbogast
……….
“I would bank it to have savings for a rainy day.”
—Naomi Young Hughes
……….
“With $1000, all small debts were paid, which then made cash available to pay off a larger debt.”
Ana Chinchilla
MONEY 401(k)

3 Things to Know About Your 401(k)’s Escape Hatch

ladder leading to a bright blue sky
Alamy

More and more 401(k)s offer a formerly rare option—a brokerage window. That's raising questions from Washington regulators. Here's what you should watch out for.

While 401(k)s are known for their limited menu of options, more and more plans have been adding an escape hatch—or more precisely, a window. Known as a “brokerage window,” this plan feature gives you access to a brokerage account, which allows you to invest in wide variety of funds that aren’t part of of your plan’s regular menu. Some 401(k)s also allow you to trade stocks and exchange-traded funds, including those that target exotic assets such as real estate.

No question, brokerage windows can be a useful tool for some investors. But these windows carry extra costs, and given the increased investing options, you also face a higher risk that you’ll end up with a bad investment. All of which raises concerns that many employees may not fully understand what they’re getting into with these accounts. Earlier this week the U.S. Labor Department, which has been fighting a long-running battle to make retirement plans cheaper and safer for investors, asked 401(k) plan providers for information about brokerage windows.

You may wonder if a brokerage window is something you should use in your 401(k). To help you decide, here are answers to three key questions:

How common are brokerage windows?

Not long ago these features were rare. As recently as 2003, just 14% of large plans included offered a brokerage window, according to benefits company Aon Hewitt. But they’ve grown steadily more popular over the past decade, with about 40% of plans offering this option as of 2013. Interestingly, the growth has taken place even as more 401(k)s have opted to take investment decisions out of workers’ hands by automatically enrolling them in all-in-one investments like target-date funds.

Those two trends aren’t necessarily at odds. Experts say companies often add brokerage windows in response to a small but vocal minority of investors, who, rightly or wrongly, believe they can boost returns by actively picking investments. But overall just 5.6% of 401(k) investors opt for a window when it is offered. The group that is most likely use a brokerage window: males earning more than $100,000, about 9% of whom take advantage of the feature, according to Hewitt. (Not surprisingly, this group also tends to have the corporate clout to persuade HR to provide this option.) By contrast, only about 4% of high-earning women use a window.

When can brokerage windows make sense for the rest of us?

That depends in part on whether the other offerings in your 401(k) meet your needs. If you want an all-index portfolio, for example, a brokerage window may come in handy. Granted, more plans have added low-cost index funds, especially if you work for a large or mid-sized company. Today about 95% of large employers offer a large-company stock index fund, such as one that tracks the S&P 500, according to Hewitt.

Workers at small companies are less likely to enjoy the same access, however. These index funds are on the menu only about 65% of the time in plans with fewer than 50 participants, according to the Plan Sponsor Council of America, a trade group.

Moreover, even in large plans investors seeking to diversify beyond the broad stock and bond market can find themselves out of luck. Only about 25% of plans offer a fund that invests in REITS. And only about two in five offer a specialty bond fund, such as one that holds TIPS.

But even if a window allows you to diversify, you need to consider the additional costs. About 60% of plans that offer a brokerage window charge an annual maintenance fee for using it, according to Hewitt. The average amount of the fee was $94. And investors who use the window typically also pay trading commissions, just like they do at a regular brokerage.

Where does that leave me?

Before you decide to opt for a brokerage window, check to see if the fees outweigh the potential benefits. Here are some back-of-the-envelope calculations to get you started:

If you have, say, $200,000 socked away for retirement, paying an extra $100 a year to access a brokerage window works out to a modest additional fee of 0.05%. While the brokerage commission would increase that somewhat, you can minimize the damage by trading just once a quarter or once a year.

If your plan includes only actively managed mutual funds with annual investment fees in the neighborhood of 1%, the brokerage window could allow you to access ETFs charging as little as 0.1%. That means you could end up paying something like 0.15% instead of 1%.

If your plan has low-cost broad market index funds, however, a brokerage window offers less value. Say you want to add more more specialized investment options, such as a REIT or emerging market fund. Even if you have $200,000 in your 401(k), you’ll probably only invest a small amount in these more exotic investments—perhaps $5,000 or $10,000. So a $100 brokerage fee would increase your overall costs on that slice of your portfolio to 1% to 2%. Plus, you’ll pay brokerage commissions and fund investment fees. In that case, better to leave the escape hatch shut.

MONEY mutual funds

Here’s Why You Should Never Pick a Stock Again

Claw game machine
Stacey Newman—iStock

The nation's largest pension fund and the most influential fund rater are both signaling that stock picking is dying as an investment strategy. If you're still trying to beat the market, it may be time to reconsider.

The giant pension fund known as Calpers, which oversees more than $290 billion on behalf of nearly 1.7 million California public employees, is reportedly mulling whether to cut back its stake in actively managed stock strategies — as well as hedge funds — according to the Wall Street Journal.

This doesn’t come as a total surprise — the California Public Employees’ Retirement System hinted at the move as early as last fall. Yet anything Calpers says or does sends ripples throughout the investment world because it is seen as such a trendsetter.

And right now, the trend is decidedly against trying to stock pick your way to investment success.

The $17 trillion mutual fund industry was initially built on the strength of the investment-picking skills of famous money managers like Fidelity’s Peter Lynch, who attracted billions of dollars in assets through the force of their reputations.

Yet in recent years, investor have started to recognize that such eye-popping returns are fleeting. In fact, they are the exception, not the rule.

A recent analysis of funds by Standard & Poor’s found that in the past three years, only about one out of five blue-chip stock fund managers outperformed the basic market benchmarks that they’re theoretically paid to beat. And only around one out of seven stock pickers who specialize in small-company stocks managed to beat a basic small-stock index.

Not surprisingly, investors have reacted to this lousy performance by redirecting their money elsewhere — in this case, to passively managed index funds that simply buy and hold all the stocks in a market benchmark like the S&P 500.

John Rekenthaler of Morningstar, noted in a head-turning column last week that over the past 12 months, passive mutual funds and exchange-traded funds attracted more than two thirds of all the net new money that flowed into U.S. funds

The numbers weren’t the most startling thing about Rekenthaler’s column, though. In it, Rekenthaler — the vice president of research at Morningstar, whose mission it is to rate fund managers — asked the rhetorical question “Do active funds have a future?” And he answered: “Apparently, not much.”

Like the Calpers’ move, Morningstar’s missive isn’t worth noting just because a lot of investors may happen to read it. Morningstar made its name helping small investors sort through thousands of active funds with devices like its “star ratings.”

Is this the tipping point where indexing becomes the primary way that individuals will invest going forward?

That’s hard to say. But if Calpers and Morningstar are starting to write off active managers, you have to think long and hard about sticking with them yourself.

MONEY stocks

Here’s How to Make Money on Our Graying Population

With the fastest-growing segment of the global population aged 60 and over, biotech, medical devices, drugs and health care services all make for a durable investing strategy.

For health care, gray is the new black.

The fastest-growing segment of the global population is aged 60 and over, according to the United Nations Department of Economic and Social Affairs. That slice of humanity is expected to increase by 45% by 2050.

The surge in the older population has contributed to a wave of new product introductions in biotechnology, medical devices and pharmaceuticals, and expansion of health care services.

In addition, health care is a remarkably durable sector for investors, soldiering on despite periodic market downturns, like the one seen last week when the S&P 500 index had its worst week since 2012.

Overall, there’s a bounty of money being spent on healthcare that’s unlikely to be impacted by other economic trends.

One of the best ways to own the biggest players in the health care industry is through the Vanguard Health Care ETF, which holds global giants like Johnson & Johnson JOHNSON & JOHNSON JNJ 0.7576% , Pfizer PFIZER INC. PFE 0.034% , and Merck MERCK & CO. INC. MRK 0.1833% .

Charging 0.14% in annual management expenses, the Vanguard fund, which is almost entirely invested in U.S.-based stocks, gained 20% for the 12 months through Aug. 1, compared with 15% for the S&P 500 Total Return Index. Long-term, the Vanguard fund has been a solid performer, averaging 10.5% annually for the decade through Aug. 1. That compares with an average 7% return for the MSCI World NR stock index.

For more non-U.S. exposure, consider the iShares Global Healthcare ETF, which charges 0.48% for annual expenses.

The iShares fund has about 60% of its portfolio in North American stocks, with the remainder in European and Asian-based companies such as Novartis, Roche Holding, and GlaxoSmithKline GLAXOSMITHKLINE PLC GSK 0.4706% . The fund gained 19% over the 12 months through Aug. 1.

For a more focused play on leading-edge biotech and genomic companies, the First Trust NYSE Arca Biotech Index ETF samples some of the hottest companies in that sub-sector. Holdings include industry leaders Gilead Sciences GILEAD SCIENCES INC. GILD 0.0465% , Biogen Idec BIOGEN IDEC INC. BIIB 0.5275% , and InterMune INTERMUNE ITMN 0.3278% .

The First Trust fund was up nearly 25% for the 12 months through Aug. 1; it charges 0.60% in annual expenses.

Good Valuations Available

Since most institutional portfolio managers have seen the merits of health care stocks for years, there are probably few bargains available, although some sectors are pricier than others. Biotech stocks, in particular, are in high demand, although they experienced a sell-off earlier this year.

“On the other hand,” Fidelity Investments analyst Eddie Yoon said in a recent report, “some large-cap, stable growth companies across the [health care] sector continue to appear attractive, based on their stable underlying business fundamentals.”

Unlike other sectors such as consumer discretionary that are directly tied to overall economic conditions, health care is often insulated from broader economic trends. When the S&P 500 index dropped 37% in 2008, the Vanguard fund only lost 23%; the First Trust fund was off 18%. While biotech stocks tend to be volatile, the mainstream health care companies are seen as defensive holdings and more immune to broader market pressures and poised for bankable growth.

Long term, the more volatile biotech stocks of today may be tomorrow’s winners. The growing science of genomics will allow biotech companies to customize drugs to a patient’s genetic make-up. Just three years ago it cost $95 million to sequence a human genetic code. Now it costs about $4,000, with the price dropping every year. That will translate into more precise treatments with fewer side effects.

There are several concurrent waves of innovation in health information technology, diagnostics and delivery of services. More patients can be monitored and treated at home with the improvement in information technology. Diseases are being discovered and treated earlier, which means fewer hospitalizations.

In the United States alone, health care spending is buoyed by the $3 trillion spent annually on Medicare patients. While policymakers say this number is unsustainable and must be reined in, that does not change a key fact: Some 10,000 Baby Boomers are turning 65 every day. They will continue to demand the best drugs and treatments.

MONEY stocks

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MONEY 401(k)s

Why This Popular Retirement Investment May Leave You Poorer

140718_REA_TARGETFUNDS
slobo—Getty Images

Target-date funds are supposed to be simple all-in-one investments, but there's a lot more going on than meets the eye.

Considering my indecision about how to invest my retirement portfolio (see “Do I Really Need Foreign Stocks in My 401(k)?”) you would think there’s an easy solution staring me in the face: target-date funds, which shift their asset mix from riskier to more conservative investments on a fixed schedule based on a specific retirement date.

These funds often come with attractive, trademarked names like “SmartRetirement” and are marketed as “all-in-one” solutions. But while they certainly make intuitive sense, they are not remotely as simple as they sound.

First introduced about two decades ago, the growth of target-date funds was spurred by the Pension Protection Act of 2006, which blessed them as the default investment option for employees being automatically enrolled by defined contribution plans, such as 401(k)s. And indeed, investing in a target-date fund is certainly better than nothing. But the financial crisis of 2008 raised the first important question about target-date funds when some of them with a 2010 target turned out to be overexposed to equities and lost up to 40% of their value: Are these funds supposed to merely take you up to retirement, or do they take you through it for the next 20 to 30 years?

The answer greatly determines a fund’s “glide path,” or schedule for those allocation shifts. The funds that take you “to” retirement tend to be more conservative, while the “through” funds hold more in stocks well into retirement. Still, even target-date funds bearing the same date and following the same “to” or “through” strategy may have a very different asset allocations. For a solution that’s supposed to be easy, that’s an awful lot of fine print for the average investor to read, much less understand.

Then there is the question of timing for those shifts in asset allocation. Some target-date funds opt for a slow and gradual reduction of stocks (and increase in bonds), which can reduce risk but also reduce returns, since you receive less growth from equities. Others may sharply reduce the stock allocation just a few years before the target date—the longer run in equities gives investors a shot at better returns, but it’s also riskier. Which is right for you depends on how much risk you can tolerate and whether you’d be willing to postpone retirement based on market conditions, as many were forced to do after 2008.

In short, no one particular portfolio is going to meet everyone’s needs, so there’s a lot more to consider about target-date funds than first meets the eye. If I were to go for a target-date fund, I would probably pick one that doesn’t follow a set glide path but is instead “tactically managed” by a portfolio manager in the same manner as a traditional mutual fund. A recent Morningstar report found that “contrary to the academic and industry research that suggests it’s difficult to consistently execute tactical management well, target-date series with that flexibility have generally outperformed those not making market-timing calls.”

Maybe it’s the control freak in me, but I prefer selecting my own assortment of funds instead of using a target-date option where the choices are made for you. Granted, managing my own retirement portfolio was a lot simpler when I was young and had a seemingly limitless appetite for risk. But even as I get older and diversification becomes more important, I still want to be in the driver’s seat. Anyone can pick a target, but there is no one, single, easy way to get there.

Konigsberg is the author of The Truth About Grief, a contributor to the anthology Money Changes Everything, and a director at Arden Asset Management.

Related links:

 

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MONEY target date funds

Target-Date Funds Try Timing the Market

Managers of target-date retirement funds seek to boost returns with tactical moves. Will their bets blow up?

Mutual fund companies are trying to juice returns of target-date funds by giving their managers more leeway to make tactical bets on stock and bond markets, even though this could increase the volatility and risk of the widely held retirement funds.

It’s an important shift for the $651 billion sector known for its set-it-and-forget-it approach to investing. Target-date funds typically adjust their mix of holdings to become more conservative over time, according to fixed schedules known as “glide paths.”

The funds take their names from the year in which participating investors plan to retire, and they are often used as a default investment choice by employees who are automatically enrolled in their company 401(k) plans. Their assets have grown exponentially.

The funds’ goal is to reduce the risk investors take when they keep too much of their money in more volatile investments as they approach retirement, or when they follow their worst buy-high, sell-low instincts and trade too often in retirement accounts.

So a move by firms like BlackRock Inc., Fidelity Investments and others to let fund managers add their own judgment to pre-set glide paths is significant. The risk is that their bets could blow up and work against the long-term strategy—hurting workers who think their retirement accounts are locked into safe and automatic plans.

Fund sponsors say they aren’t putting core strategies in danger—many only allow a shift in the asset allocation of 5% in one direction or another—and say they actually can reduce risk by freeing managers to make obvious calls.

“Having a little leeway to adjust gives you more tools,” said Daniel Oldroyd, portfolio manager for JPMorgan Chase & Co’s SmartRetirement funds, which have had tactical management since they were introduced in 2006.

GROWING TACTICAL APPROACH

BlackRock last month introduced new target-date options, called Lifepath Dynamic, that allow managers to tinker with the glide path-led portfolios every six months based on market conditions.

Last summer, market leader Fidelity gave managers of its Pyramis Lifecycle strategies—used in the largest 401(k) plans—a similar ability to tweak the mix of assets they hold.

Now it is mulling making the same move in its more broadly held Fidelity target-fund series, said Bruce Herring, chief investment officer of Fidelity’s Global Asset Allocation division.

Legg Mason Inc says it will start selling target-date portfolios for 401(k) accounts within a few months whose allocations can be shifted by roughly a percentage point in a typical month.

EARLY BETS PAYING OFF

So far, some of the early tactical target-date plays have paid off. Those funds that gave their managers latitude on average beat 61% of their peers over five years, according to a recent study by Morningstar analyst Janet Yang. Over the same five years, funds that held their managers to strict glide paths underperformed.

But the newness of the funds means they have not been tested fully by a market downturn.

“So far it’s worked, but we don’t have a full market cycle,” Yang cautioned.

The idea of putting human judgment into target-date funds raises issues similar to the long-running debate over whether active fund managers can consistently outperform passive index products, said Brooks Herman, head of research at BrightScope, based in San Diego, which tracks retirement assets.

“It’s great if you get it right, it stings when you don’t. And, it’s really hard to get it right year after year after year,” he said.

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