How to Invest a Large Sum of Money Wisely
Let’s say you’ve come into a large sum of money—perhaps $1 million or more from stock grants, a bonus, or the sale of a home. Congratulations! After accounting for taxes, the real challenge is deciding how to invest it. Given the significant amount, the last thing you want to do is lose a portion of it due to poor planning.
After 30 years of investing, I’ve learned that no matter how wealthy you become, investing a large sum of money can still feel daunting. Even if that $1 million represents just 10% or less of your total net worth, reinvesting it presents several challenges. First, you don’t want to feel foolish if your investments underperform. Second, you may second-guess your decisions. Third, you might even start questioning the true purpose of having so much money in the first place.
Ironically, there are moments when not having the responsibility of investing a large sum might seem easier. But if you’re fortunate enough to receive a financial windfall, my goal is to help you feel confident about your investment choices. And if you’re still unsure, hiring a financial advisor can be a smart move to provide guidance and peace of mind.
“A lot of money” is subjective. However, if the amount you’re planning to invest is at least 10 times greater than your typical investment, that’s what I call a lot of money — and having a clear investment plan becomes essential.
### Reinvesting a Large Sum of Money Is Stressful
One reason I prefer real estate investing is that I can deploy substantial capital without feeling as much stress as I do when investing in stocks. As a result, I often end up allocating more money to real estate, often using mortgage debt, which can potentially generate larger returns.
With physical real estate, there’s no daily ticker symbol reminding me how much I’ve gained or lost. And since losses hurt far more than gains bring joy, stock market corrections can feel particularly painful. By contrast, I prefer to buy and hold real estate, focusing on generating rental income.
However, the challenge with owning a large real estate position is that selling can result in large windfalls. In 2017, I sold a property I had owned for 12.8 years, netting about $1.15 million after fees and taxes (~340% cash on cash gains). Due to regular and extra principal payments along the way, my total proceeds were closer to $1.75 million.
Figuring out how to reinvest the proceeds from a home sale was incredibly challenging. Ultimately, I decided to split the funds roughly equally among municipal bonds, stocks, and private real estate. While stocks and private real estate performed well, municipal bonds struggled after the Fed began aggressively hiking interest rates in 2022.
In 2025, I plan to sell another property to streamline my physical rental portfolio down to three properties in San Francisco. If I sell within my expected price range, I anticipate walking away again with a significant windfall. As a result, I’m writing this post not just for you but also for myself in preparation.
### How to Reinvest a Large Amount of Money Wisely: A 3-Step Framework
For many personal finance enthusiasts, diligent saving and investing will eventually lead to large financial windfalls. However, because you’re likely frugal by nature, suddenly having a lot of cash can feel overwhelming. The large amount of money will likely not be commensurate with your spending habits. That’s why I follow a three-step process for reinvesting large sums of money wisely.
**Step 1: Understand the Source of the Money and Its Risk Level**
Windfalls usually stem from a liquidity event. Perhaps your company was acquired or went public. Maybe you had an exceptional year and received a large bonus. Or you finally cashed out a long-held stock position for substantial gains.
Identify where your money is coming from and assess whether you want to maintain, reduce, or increase its risk profile.
– High-risk money: Startup equity is akin to a lottery ticket with extreme volatility.
– Medium-risk money: Proceeds from selling a rental property or primary residence.
– Low-risk money: Year-end bonuses, as these are earned through effort and not guaranteed annually.
Your goal is to thoroughly understand the risk profile of your windfall and determine whether to maintain or adjust it through reinvestment.
**Step 2: Create a Capital Allocation Plan by Percentage (Not Dollar Amount)**
Once you understand your money’s source and risk level, it’s time to establish an appropriate capital allocation strategy. Use percentages instead of dollar amounts to help you overcome your fear of investing.
**Step 3: Dollar-Cost Average Within a Set Time Frame**
After determining the appropriate allocations, it’s time to start dollar-cost averaging (DCA). While you could invest everything at once, spreading out purchases can help mitigate risk. It’ll also help you feel less like a fool given it’s impossible to perfectly time the market.
Investing a large sum of money over three to six months is my ideal timeframe. It’s short enough to take advantage of opportunities and minimize cash drag, yet long enough to learn more about the investing landscape and refine your financial goals and risk tolerance.
### Having An Investment Game Plan Is Key
Investing large sums of money can be nerve-wracking. Even as $1 million becomes a smaller percentage of your overall net worth, you’ll still feel pressure to deploy it wisely. The key is to develop an investment plan and stick to it. If you’ve accounted for different scenarios in advance, you’ll feel more confident executing your strategy.
**One Last Point: Don’t Forget to Enjoy Your Money Too!**
Hopefully, you’ve found this guide helpful in learning how to invest a large sum of money in a rational and strategic way. But at some point, you’ll accumulate enough where decumulation makes sense. That’s why I encourage you to set aside a small portion—perhaps 1% to 3% of your proceeds or 10% of your profits—and enjoy it however you like!
Remember, it’s okay to spend some of the money. Reward yourself for your hard work and enjoy the fruits of your investments.
### FAQs
**1. What is the recommended timeframe for investing a large sum of money?**
It is recommended to invest a large sum of money over three to six months to take advantage of opportunities and minimize cash drag.
**2. How should I determine the risk level of a windfall?**
Identify where your money is coming from and assess whether you want to maintain, reduce, or increase its risk profile.
**3. Should I hire a financial advisor to help me invest a large sum of money?**
Hiring a financial advisor can be a smart move to provide guidance and peace of mind when investing a large sum of money.
### Conclusion
Investing a large sum of money can be a daunting task, but with a clear plan and understanding of your risk tolerance, you can make wise investment decisions. By following a structured framework and sticking to your investment plan, you can feel confident in growing your wealth and achieving your financial goals. Don’t forget to enjoy the rewards of your hard work and smart investments along the way!