For most investors, $500,000 isn’t a starting investment — it’s an investment goal. And the good news: that half a million could possibly grow into a million, a million-and-a-half, or even — c’mon, let’s dream —a two-million-dollar nest egg you can retire on.
How do you grow $500,000? While there’s several ways to diversify your money. Let’s look at the most common ways to invest in Canada.
Investing $500,000 in the stock market
For greater growth, there’s no place like the stock market.
Stocks have unlimited growth potential, meaning there’s no cap on what your $500,000 could earn. The higher returns on stocks can not only trump the returns on safer investments (like bonds and GICs) but also help your money outpace the rate of inflation.
Of course, stocks come with risks. As much as you can gain, you stand to lose as much as you invest. That’s why it’s important to diversify your stocks. You don’t want to invest $500,000 — or even a large portion of it — in one or two companies. We would recommend picking at least 20 to 25 stocks from different market sectors and various industries within those sectors.
With that in mind, let’s look at some different types of stocks that can help you both reduce risks and potentially grow your $500,000.
Growth stocks
Growth stocks are typically new companies with a lot of potential for growth. Often, the companies you wished you had invested in years ago — like Amazon or Apple — were once growth stocks just one innovation away from exploding in value.
It’s not always easy to spot growth stock companies, which is one of their risks. Some companies appear to have industry-changing ideas, only to find them failing to take ground. Others are expanding rapidly, but unable to become profitable enough to sustain their growth.
Because of these risks, we wouldn’t recommend investing a large portion of your $500,000 into growth stocks. But smaller portions invested in companies that have potential could be worthwhile.
Dividend stocks
Dividend stocks are companies that pay a portion of their revenue to shareholders. Many large institutions — like banks and utility companies — count themselves among the dividend stock cohort, as do companies with a long history of business, such as energy and railroad companies.
Putting a portion of your $500,000 toward dividend stocks can help you in two ways. One, you’ll earn passive income. Second, you could earn capital gains on the stock itself (assuming its price appreciates).
When looking for dividend stocks, don’t assume the best companies will have the highest dividend yields. Sometimes, companies will pay higher yields to attract investors, even though their fundamentals aren’t as strong as companies with lower payouts. Pay attention to how long the company has paid a dividend and how many consecutive years it has increased its yield.
Blue-chip stocks
Blue-chip stocks are large corporations that have established themselves as industry leaders. They’re well respected by investors, both for their history of reliable growth and dividend payouts.
Blue chips are perfect for conservative investors who don’t want to risk losing a portion of their $500,000. They can also bring greater stability to an investment portfolio of growth stocks.
ETFs and mutual funds
For investors who don’t want to choose individual stocks, an ETF or mutual fund could be a good option.
ETFs and mutual funds are baskets of stocks: they contain small pieces of numerous companies. This helps you diversify your investment money, without requiring you to do the heavy work of picking different stocks yourself.
Investing $500,000 in fixed income investments
Fixed income investments have a steady and predictable rate of return. They typically involve fewer investing risks than stocks but have less potential for larger earnings.
These investments can anchor your $500,000 investment and help you avoid losing a large portion of it during tumultuous market swings. In fact, most wealth advisors would recommend dedicating a portion of your investment to the following fixed income securities, even if you’re an aggressive day trader.
Bonds
Bonds are essentially loans that you lend out to governments and corporations. They’re less risky than stocks, have higher interest rates than most other fixed income securities, and can sometimes be traded on stock exchanges for a capital gain.
Most bonds have a fixed rate of return (called the coupon rate). They also have a “face value,” which is the upfront amount you lend to the bond issuer. The face value is paid back to the bondholder at the end of the bond’s term (the “maturity date”).
In general, the longer the bond’s term, the higher the interest rate. Likewise, if the bond issuer has a shady financial standing, they might offer a higher rate to entice investors.
While investing the full $500,000 in bonds could mean missing out on larger capital gains from stocks, using a small portion of it to buy long-term bonds could reduce the overall risk in your portfolio.
Guaranteed investment certificates (GICs)
A guaranteed investment certificate (GIC) is a secured deposit offered by banks and trust companies. In essence, you’re lending a lump sum for a certain period, while also earning a rate of return on your investment.
Because they’re issued by large financial institutions, GICs have minimal risks. In fact, the biggest risk is yourself: If you break the terms in your contract (such as request to withdraw money early), you could face penalties.
Most GICs have terms that last one to five years. Like bonds, the longer the term, the higher the interest rate. Because GIC interest rates are linked to prime rates, they can make a smart fixed income investment when lending rates are high.
Investing $500,000 in real estate
Having $500,000 in cash can help you hurdle the steep barrier to real estate investing that many others simply cannot surpass. Of course, you don’t have to buy properties or flip them: you can take a passive approach and buy shares in a REIT or issue a private mortgage.
Let’s look at three of the best ways to invest in real estate when you have $500,000 to work with.
Rental property
Rental property with a high occupancy rate (that is, tenants occupy a high percent of the space) can be a generous cash cow. You’ll have a steady monthly income from rent, plus whatever capital appreciation you build off the building itself.
You need a 20% down payment to buy rental property (a smaller amount if you intend to live there, too). On top of that, you should be prepared for all the expenses that come with being a landlord, such as mortgage interest, insurance, property taxes, maintenance, and cash reserves for slow periods.
A $500,000 lump sum is enough to get started. But earning that money back off your tenants could take some time. Doing research on rental and occupancy rates is key, as you want to buy in an area with population growth and job opportunities.
Investment property
Buying investment properties in hot housing markets can also be a lucrative way to invest your $500,000.
This could involve buying a vacant or distressed property, rehabbing it, and selling it for a profit. Or you could buy a foreclosure or short sale, give it a makeover, and sell it for a higher price.
Drawbacks to real estate investing include spending a nauseating amount of time and money on your properties. It can also be difficult to find property deals, secure a mortgage, and sell at a price that ensures you’re making a profit.
REITs
For a passive approach to real estate investing, a REIT can be a profitable place to invest a portion of your $500,000.
A REIT is a real estate company that uses investor dollars to buy and manage real estate properties. Most REITs have a specialty, such as health care, storage, or office space, which helps you understand how the REIT makes money (leasing space, rent from tenants, or selling property).
REIT companies are legally required to pay 90% of their taxable income to shareholders. That makes the dividends on REITs super lucrative. With $500,000 at your disposal, even a small portion dedicated to REITs could give you a steady stream of passive income — even more if you combine REITs with dividend stocks and the fixed income investments we discussed above.
Before you invest $500k in Canada …
- Pay off all high-interest debt.
- Pay off your mortgage (or a portion of it).
- Put aside 3 to 6 months of savings in an emergency fund account.
- Open a brokerage account with low trading fees.
- Consider hiring a wealth advisor.