How To Invest $100K For 2021
As we approach the end of 2020 and turn our sights to the new year, lets explore how to invest $100K for 2021. This will outline a step by step approach of how I would take $100,000 USD and invest it for the upcoming year. 2020 will be one for the history books, and one that nobody with investible assets forgets – for both good and bad. It has been a year marked with one of the nastiest crashes in March, followed by a seemingly relentless rally right up and through December. I’ll never forget the day oil priced negative!
2020 At a Glance
The Retail Investor Takes Over Equity
It was the year when smaller investors flocked to commission free stock trading services such as Robinhood and began scooping up shares. Many saw incredible returns coming from companies such as Zoom, Apple, Netflix, Tesla, Facebook, Amazon, and Microsoft, while also gambling with distressed tourism stocks such as Carnival, Hertz, and American Airlines. It was the first time the Retail investor set the pace and the “Smart Money” needed to catch up. Will this trend continue or will the big pension and hedge funds win back control of the market?
Industry Takes Over Crypto
Another pervasive theme in 2020 was the rise of Bitcoin and other cryptocurrencies such as Ethereum through industry adoption. PayPal, Mass Mutual, and of course MicroStrategy, all began scooping bitcoin and entering into sizeable positions. MicroStrategy alone put over 1 billion dollars into the digital currency. This had a tremendous positive impact on the space making it the best performing asset of the year. In just the last 3 months alone it has risen 142%. Which major commercial player will be next to make a big splash into the crypto space? Which country will begin building up reserves?
COVID-19 Vaccine
If there is one thing 2020 will be remembered for its the COVID-19 virus and how quickly a viable vaccine was discovered. The Pfizer–BioNTech COVID-19 vaccine, began trials in April 2020 and by November, the vaccine had been tested on more than 40,000 people and by December some countries began administering the vaccine to those most at risk. A pervasive theme in 2021 will definitely be the large scale administration of the vaccine across the globe. Also, what will happen with the new variant strain that is being found in the UK? Will another vaccine be required?
Investing 100K in 2021
Why 100K?
Through the exercise today I will show you how I would split up $100,000USD. I choose $100K because this can be easily divided into an amount that is applicable to any account balance; super simple math adjustable for any account size. Let’s dig in and find out how to Invest $100K for 2021.
Step 1 – Cash
First step is to play some defense and set aside some cash. I usually want 10 to 15% cash and with the current run up in asset prices across the board, I want 12.5% in a high interest savings account. If your current bank doesn’t offer a competitive rate then check out this list of banks that do.
Purpose Behind Cash
My first move is always defensive. If the markets correct hard in 2021 then I have cash on hand to jump in and pick up shares or Bitcoin on the cheaper side of the current prices being asked. All you have to do is rewind 12 months ago to see how wise holding cash turned out to be. I always have cash on hand so I’m never fully invested and I’m always looking for a deal.
If I run into an emergency, then I tap into these cash reserves first and I don’t sell my shares or riskier assets that could also be taking a dive along with my emergency situation.
If you would to learn more about my love of cash and why I hold it dear, please read my Cash is King article.
Why not hold Short Bonds like SHY?
Don’t be fooled by the nice distribution yield on short bond funds. All such bonds are trading at a premium and the principle value will decline as the bond matures. When you compare the interest rate of high yield savings accounts vs short bonds, compare the Bond Yield to Maturity. This indicates that the predicted total return will be. See the below example for SHY.
Short Bonds Will Return Nothing After Taxes
So while you might enjoy getting a near 1.00% distribution yield, your actual total return will be closer to 0.14%. After taxes you’re spinning tires. So use Yield to Maturity or YTM when comparing short bonds against cash. Yes, short bonds will beat money market accounts, but not a high interest savings account. Also remember that cash carries no market fluctuations whereas short bond funds will.
After allocating cash, here is what our portfolio looks like after Step 1:
Step 2 – Gold
Next step is to pick up some gold. Gold is God’s money and stands the test of time. It has been around for every US president, prized by the Egyptians, Babylonians and Romans. It has been used to mint money and is stored in vaults as a store of value. Ever since the dollar was moved off the gold standard in 1971, gold has risen in nominal dollar terms because the dollar has been printed recklessly. Especially during the last 20 years. We want protection from central bank printing and inflation going forward. This will also hedge out some of our inflation risk exposure with the cash in Step 1.
I like to gain my exposure to gold through ETFs. This simplifies the storage and security issues and it allows me to quickly sell or buy to rebalance. I like the GLDM ETF because the management fees are a bit lower than GLD albeit with a bigger bid/ask spread. GLDM is also priced to represent 1/100 of an ounce of gold.
5 Percent in Gold Please
I want to pick up $5,000 in GLDM which will come with an annual MER of 0.18% Nice and tight and the cheapest fees currently on exchanges today.
Here we are after Step 2:
Step 3 – Bitcoin
Yes, we want Bitcoin! This decentralized, deflationary, digital currency is taking the investment world by storm, and for good reason! In the face with uncontrolled government spending, and currency printing, it is nice to have an asset class that is impervious to these influences. Each day the energy to mine a new Bitcoin increases because the algorithm difficulty increases, and every 4 years the number of coins mined each day is cut in half. Fiat currencies will have great difficulty keeping up with this. Throw in some trust from industry adoption and payment facilitators like PayPal and there is a very bright future for this asset. If you want to know more details and why I love this opportunity read my article on 4 Reasons You Should Invest in Bitcoin.
But Be Careful
While this is a tremendous opportunity for investment, we need to keep our enthusiasm in check and recognize this market is still new, and the volatility makes it highly speculative. If you’d like to temper your excitement read my article on why Bitcoin is not a good store of value. Don’t get me wrong – I’m long Bitcoin, but I don’t use it as a store of value. It is a speculative bet for me.
Let’s put 2% of our assets into Bitcoin.
Step 4 – Stocks
Next up we want to start doing the real allocations and start getting into stocks. These are absolutely critical for long term growth and we can be confident we have a proven asset class that provides incredible growth potential which really means wealth creation!
Broad Exposure
We want broad exposure across US, International and Emerging market stocks. We also want all types and sizes including small to large companies, value and growth, dividend payers and non-dividend payers. The best way to accomplish this is by buying Index ETFs. This also keeps our fees nice and low.
Calculations and Breakdowns
The calculations are going to be as follows to figure out our stock market allocations:
First, Our stock allocation is going to be 70% of our total capital, so $70,000.
Second, of this 70K for stocks, we want 55% of this allocated to US stocks which comes out to $38,500. We will use ITOT for our ETF here.
Third, of the 70 set aside for stocks, we tap into our developed international stocks at 34% which comes out to $23,800. We will use IDEV as the ETF for this exposure.
Last, we grab the remaining $7,700, and put that into emerging markets. Our ETF of choice here will be EEMV so we get some reduction in the volatility for this investment.
Step 5 – Bonds
The remaining $10,500 or 10.5% is going into bonds. We want all of this money going into long term duration government bonds. Now we don’t want short term or medium term bonds because the benefits these provide is covered by the cash. If interest rates rise, then cash will capture this for us perfectly.
We Want Downside Protection
When we buy bonds we are looking for some downside protection for our stocks through diversification and to generate stable returns. The best bonds that offer this protection are long duration government bonds. They will rally when everyone wants to take risk off the table as sell their stocks. They will rise faster than shorter term bonds especially if interest rates are dropped.
Extra Ammo
I’m hoping you can start to see a bit of the genius here. I’m planning and preparing for the market crash so I can take advantage of it! Consider these steps during a market crash:
- Stocks begin to crash and sell off
- Long bonds begin to rise as a safe haven
- If the feds lower interest rates it will accelerate the long bonds rise even more
- Cash stays still even in the face of declining interest rates
- Gold will likely rise as a safe haven asset and the lowering of interest rates will exaggerate this
- Bitcoin will likely crash with stocks as it is seen as a risk asset; though this might change in the coming years
- Sell long bonds, sell gold, put this into cash, take the combined cash and buy stocks and bitcoin back up to original target levels.
- If the crash continues, I still have cash on hand and can deploy one to two more times.
- Over the course of the coming years I sell the stock and bitcoin back and build up cash and bond levels in preparation for the next crash.
Buy TLT
With all this said, buy TLT for long term treasury exposures with bonds of 20+ years.
Summary
I wanted to do a performance summary for the last year to show and highlight just how well this strategy would have performed with a quarterly rebalancing strategy. It cranks out a respectable 14.27% return on even less risk than other portfolios. Check it out.
This happens because of two factors: One, the Bitcoin allocation provides tremendous performance even at just 2% allocation. Second, the 12.5% cash holds up under stress and was available for the quarterly rebalance in March.
Ideas for 2021
I hope in the end this gives you some good ideas of how and where to invest your money for 2021. If you have any questions or comments its best to reach me on Twitter: @mywealthmoney
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