How to Invest a Million Dollars

I don’t have the pleasure of personally being in charge of investing a million dollars—yet—so when I came across another blogger asking the question on Twitter, I just knew I had to come up with a plan.

Quick Summary:

$450,000 in large cap domestic stocks (such as VOO-Vanguard 500 Index Fund)
$150,000 in small cap domestic stocks (such as the VSMAX-Vanguard Small-Cap Index Fund)
$150,000 in international stocks (such as the VWO-Vanguard FTSE Emerging Markets ETF or the VEU-Vanguard FTSE All-World ex-US ETF)
$100,000 in an REIT (sucg as VNQ-Vanguard REIT Index Fund)
$100,000 in bonds (such as the BIV-Vanguard Intermediate-Term Bond ETF and BLV-Vanguard Long-Term Bond ETF)
$50,000 in the best high yield savings account available at the time.

Disclaimer

I am not a financial planner so please don’t adopt any investment strategy I recommend thinking that it will make you wealthy. Do your own research and discuss it with your financial advisor. It is more fun than you might think!

Detailed Explanation

This past summer, I revisited my personal asset allocation strategy in light of my retirement time frame and goals so the strategy I propose here is very much influenced by that research. I am in my early 40s so gave myself a 20 year time frame to reach the amount I would like to have saved before I stop working full time. I feel like I have a high risk tolerance so the strategy may be more aggressive than someone else my age would be comfortable with.

Large Cap Domestic Stocks: I suggest 45% in domestic large cap stocks because their long-term performance has been consistent and I would want to see steady growth from this portion of the investment.
Small Cap Domestic Stocks: I suggest 15% in domestic small cap stocks to create opportunities for growth.
International Stocks: I suggest 15% in international stocks to again create opportunities for growth. International exposure creates balance to all the money invested in domestic stocks in case the U.S. economy goes into the pooper.
Real Estate: Also in an effort to create a balanced portfolio, I suggest a 10% investment in the Vanguard REIT Index Fund (VNQ). Real estate isn’t always the greatest investment (remember 2008?) but owning it via an index funds could lesson the blow of any future downturn.
Bonds: Traditionally, I haven’t been a huge fan of bonds but they do offer an opportunity to protect a portion of a portfolio from swings in the stock market.
Finally, I suggest 5% be held in cash in the best high-yield savings account available at the time. Several sites—such as bankrate.com or nerdwallet.com—regularly make recommendations on which company is offering the best interest rate so I would start there.

Additional Thoughts

I like to think of my investment portfolio in percentages vs. dollar amounts because it makes it easier when it comes time to re-balance, which I do annually.
Percentages also help if you are trying to balance across accounts held at two or more companies. I have accounts with my current employer in one place and with a previous employer in another. My current employer doesn’t offer a real estate option and its international option is limited so I can use the account from my previous employer to invest in those funds.
I like to invest time in researching a strategy and then not think about again for a while. This means I am not chasing the newest shiny investment trend. It also means I don’t panic with there is a market fluctuation (and there are always market fluctuations). I believe in my strategy and believe it will help me achieve my goals.
As I get closer to retirement—3-5 years out—I plan to revisit my strategy to focus less on growth and more on preservation.