InvestingPersonal finance

How to invest a bonus

How to invest a bonus

In January and February many firms, especially banks, give out annual bonuses to employees, which in some cases make up a large percentage of the employee’s annual earnings.  After years like 2017, when the economy and global stock markets have done exceptionally well, I am naturally asked, more than in most years, about how to invest a bonus.  This time last year I shared my personal story on how I invested my first 10 years of bonuses and 401(k) contributions, and here I share a somewhat more concise how-to.

While I certainly believe it is human to want to spend or donate part of it, there are a few other checklist items I like to check off before diving into the details of how to invest a bonus:

  1. Have all high-interest debts (especially non-mortgage debts) been paid off?
  2. Have the amounts for things paid annually (e.g. life insurance, property insurance, and international medical insurance premiums) been set aside?
  3. Does it make sense to use a chunk of this bonus to pay down the mortgage?

After taking care of these pre-investment questions, I then ask what is the best way to structure a lump sum bonus investment.  If you are a US taxpayer, you may first want to fully fund your 401(k) or SEP IRA for the year, especially since the SEP IRA limit has been raised to US$55,000 in 2018.  Investors who like physical property may instead look at how a bonus can fund a new property.  Otherwise, I find the most flexible way to invest a bonus is in a simple individual brokerage account, but that is of course because I am very familiar with these.

The two extreme mistakes I see with bonus investments are: 1/ keeping it all in cash, so that it doesn’t grow and has its value eroded vs rising prices, or 2/ investing it too aggressively in a concentrated bet.  Simply buying a low-cost index fund is a good solution for most, but I prefer to individually own a portfolio of profitable companies rather than a broad index of companies that includes many less profitable ones.  Unless the bonus is a large percentage of your overall wealth or lifetime earnings, taking a moderate amount of risk owning profitable businesses strikes a good balance between safety and growth.

Contact me through the form below if you’d like to discuss how to put together such a portfolio.

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