If you’re ready to invest $200,000 (or something close to it) with the goal of turning it into $1 million, this article will help you understand your options and focus your investment strategy. If you’re not sure what you should do, speaking to an investment advisor can help you figure out the best course of action.

How to Invest $200k to Make $1 Million in 5 Steps

There is no surefire way to turn your $200,000 cash into $1 million, and there certainly isn’t a guaranteed timeframe. However, there are some smart financial choices you can make that will put your investments in a better position to succeed at your long-term goal. Before looking at the investment options, let’s first dive into how to set up your investing strategy for success. Here are the five steps you can do:

1. Evaluate Your Starting Point

Putting together $200,000 to invest is no small feat. However, if you currently have that amount in savings, your overall financial situation may impact what you can invest. For example, debt from credit cards or student loans can drag you down over time. Therefore, ridding yourself of debt first might be more advantageous before you decide to make serious investments.

Additionally, consider whether your monthly expenses and income level will drive you to dip into your savings in the future. If you don’t have a stable income, locking up hundreds of thousands of dollars into long-term investments might inhibit your ability to afford the cost of living.

You’ll also want to gauge your time horizon for investing. If you’re decades away from retirement, your investments have more time to grow. On the other hand, the shorter your timeframe for investing, the more challenging it will be to hit your goal of $1 million.

2. Estimate Your Risk Tolerance

Your risk tolerance will determine what investments you’re comfortable making. In turn, different investments yield different returns. If you’re risk-averse and like sticking to bonds and certificates of deposit, your journey to $1 million will likely be so slow that you won’t get there.

Higher risk brings higher rewards. While investing in the stock market means possibly losing money, especially in the short term, market downturns tend to reverse course eventually. Tolerating higher risk goes hand in hand with evaluating your starting point. In general, the more time you spend in the equity markets, the more your investments will grow.

If you’re investing, you can never completely eliminate risk while preserving the possibility of higher returns. So, determine what level of risk you can make your peace with and put your money into different funds that can give you the returns you need to meet your goal.

That said, you don’t have to dump your money into small-cap index funds to see healthy returns. Investing in an doesn’t seek to beat the market through niche investments. Instead, it follows the performance of the top companies in the market. While still subject to a certain degree of volatility, this fund has given an average annual rate of return of 10% for over 90 years.

If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.

3. Calculate Necessary Returns

If you want to reach $1 million, running the numbers will help you see how you’ll get there. Three main factors will determine your climb to $1 million: how long you have to invest, the rate of return your investments earn and how much you can contribute to your investments per month.

For example, let’s say you’re 40 and plan on retiring at 65. You’re a little late to the investment game, but you’re bringing $200,000 to the table and can put another $125 per month into your investments. Using SmartAsset’s investment calculator, your investment would be worth $979,618 after 25 years of investing, and you would be age 65. You would be just short of your goal and could shore up the difference by investing an additional $25 per month.

This scenario requires that your investments earn at least a 6% rate of return. This rate is not unrealistic to achieve but would still necessitate planning and deliberation. A diversified investment portfolio would help you reach your goal.

4. Allocate Investments Wisely

No matter your financial goals, there are most likely multiple strategies you can use to reach them. If you know your risk tolerance and timeframe for investing, growing your nest egg is a question of how active you want to be in managing your investments.

For example, numerous index funds have provided healthy returns in the past and don’t need your regular oversight. Or, perhaps you want more hands-on trading with potentially higher yields and will invest in individual stocks, mutual funds and ETFs.

The key is to do your research, invest in funds that give returns to match your goals and diversify your assets. Of course, no individual investment is a guaranteed win. However, a portfolio with an array of investments across different sectors and industries is the most likely to return consistent gains.

How you diversify will change as you near the end of your timeframe. Starting with an aggressive approach allows you to take advantage of market swings and recover losses over the long haul. Then, when you are just a few years away from retirement, switching to a majority of low-risk, low-yield bonds can preserve your gains and still provide a trickle of interest.

5. Minimize Taxes and Fees

All investment types have associated costs. Whether you’re paying fees as you actively trade stocks or paying a financial advisor to manage your portfolio, certain expenses will mitigate your returns. Don’t let these costs get you down, though. If you’re investing wisely, you get what you pay for in robust returns. Even if you manage your investments yourself, you must pay to buy and sell on the stock market.

The other half of the cost of investing is taxes. That’s because it’s important to shield as much of your capital gains as possible. Taxes apply to different assets in various ways. For example, a tax-advantaged account like a 401(k) or individual retirement account (IRA) defers taxes on growth. The funds withdrawn in retirement will then be taxed. Conversely, a Roth IRA is taxed in the present, and the distributions during retirement are tax-free.

Additionally, you must pay short-term or long-term capital gains tax on investment gains with taxable accounts. The long-term capital gains tax rate applies to investments held longer than one year, and it’s usually the more forgiving of the two.

There are several tax-exempt methods of investing, including tax-loss harvesting. By selling off stocks at a loss to offset reported gains, you can lower taxes on some of your investments. If you do so, don’t buy substantially similar investments within a 60-day window of selling, as this could negate any tax benefits.

Investments Options to Turn $200,000 into $1 Million

Again, you have many options for how to invest $200,000 profitably. The sooner you research opportunities that interest you and get started, the more time you’ll have for your money to work for you. The assets listed below provide a way to start creating a portfolio that can weather market volatility.

Stocks

If you have an IRA or 401(k), you are most likely investing in stocks now. These accounts usually take less active management. The flip side would be to personally buy and sell individually selected stocks based on your own knowledge and experience.

Investing in stocks allows you to capitalize on the growth of the most renowned companies in the world. They can be riskier than other investments, but you’ll strengthen your portfolio overall by allocating a portion of your money to stocks.

Real Estate

Traditionally seen as a reliable investment, you can invest in real estate in multiple ways. For example, acquiring properties and renting them out can provide you with steady returns.

Additionally, you can invest in a variety of real estate properties without managing individual properties through real estate investment trusts (REITs). REITs can be bought and sold on the stock market, functioning as an investment fund. Therefore, you don’t need to manage properties or hire someone to do so. Instead, you pay fees to the company that operates the trust.

Start a Business

If you’ve had aspirations to run your own business, this could be the time to start. Designating $25,000 to $50,000 of your cash to your dream venture will leave you a minimum of $150,000 to invest otherwise, so don’t think starting a business will require every cent of your $200,000.

If you want to preserve your investment funds, you could also take out a small business startup loan. Regardless of how you get going as an entrepreneur, most businesses take tremendous hours of hard work to become profitable. However, if you plan meticulously and keep your foot on the gas pedal, a business can provide excellent returns in the long run.

Index Funds

Index funds are a set-it-and-forget-it type of investment in the stock market. With minimal fees, lower risk and healthy potential returns, index funds that follow the S&P 500 can be a staple in any portfolio.

Again, index funds allow you to diversify and receive gains based on the growth of some of the most successful companies in the world. While no bulletproof investments exist, index funds that mirror the S&P 500 have historically beaten out many other stock investment strategies.

Mutual Funds

Like index funds, mutual funds inherently diversify your portfolio since they invest across a set of assets, including stocks and bonds.

Unlike index funds, financial managers run mutual funds and try to beat the average index fund. Utilizing their access to market data analysis, mutual fund managers charge higher fees but offer potentially higher returns.

The Takeaway

If you invest $200,000 carefully over a few decades, you can create a $1 million fund to retire on. While no investments are void of risk, you can adopt strategies to give yourself the best opportunity to meet your financial goals. If you can avoid putting all your eggs in one basket then you’re much more likely to have a healthy portfolio. Though you’ll have many excellent options, foolproof investments don’t exist. However, knowing your risk tolerance and calculating returns with a realistic timeline will help you invest wisely.

Investing Tips

• Consider talking to a financial advisor about what you need to do to grow $200,000 into $1 million. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• Calculators can come in handy for estimating how much you’ll need to invest to reach $1 million. For example, SmartAsset’s asset allocation calculator can fine-tune your selection of securities necessary to hit your investment goal.

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