For many new investors, starting with a sum like $5,000 might seem modest. Some may question the impact such an amount can have in the vast world of investing.
However, past performance tells a compelling story about the benefits of time in the market and the magical effect of compound interest.
Consider this: A $5,000 investment in the SPDR S&P 500 ETF (ticker: SPY), which tracks the S&P 500, from January 1994 to August 2023 would have yielded an annualized total return of 9.9%. That is, with dividends reinvested, a $5,000 initial investment would have grown to $82,812 over that period.
But the investment world is broader than just buying SPY. There are various assets available for investors, each suited to different financial goals, risk levels and investment durations.
Whether it’s stocks, bonds or other types of investments, starting with $5,000 can indeed be a stepping stone to further financial growth.
Here are seven of the best ways to invest $5,000, according to experts:
Long-term investors willing to accept higher risk in exchange for greater growth potential can tap into the returns of the U.S. stock market via an S&P 500 index fund. Available as both mutual funds and exchange-traded funds (ETFs), an S&P 500 index fund can provide transparent, low-cost and hands-off exposure to some of the largest and most notable U.S. stocks. Some S&P 500 ETFs like the SPDR Portfolio S&P 500 ETF (SPLG) charge expense ratios as low as 0.02%.
“In his 2014 letter to Berkshire Hathaway Inc. (BRK.A, BRK.B) shareholders, Warren Buffett said that when he passes away, the instructions for the trustee for his wife will be to put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund,” says Robert Johnson, professor of finance at Creighton University Heider College of Business. “If that idea is good enough for Mr. Buffett, it is good enough for the vast majority of investors.”
Long-term investors can also consider diversifying their equity allocation via international stocks. While the U.S. stock market has outperformed over the past decade, there is no assurance of this continuing into the future. Should the U.S. market stagnate, international stocks could help buoy returns, resulting in potentially better risk-adjusted returns. To access international stocks, investors can again use a variety of low-cost index-based mutual funds and ETFs from providers like Vanguard, Fidelity and BlackRock.
“We need only go back to the first decade of this century to find a period when the U.S. market barely returned anything at all, and international markets did quite well,” says John Cunnison, chief investment officer at Baker Boyer. “No one knows what the future holds, but current valuations, dividend payout ratios and dynamics suggest international stocks as a great place for a $5,000 investment today.” A fund like Vanguard Total International Stock ETF (VXUS) can provide exposure to more than 7,900 international stocks for a modest 0.07% expense ratio.
For a shot at beating the market over the long term, consider investing that $5,000 in a smart beta fund. Unlike traditional market-capitalization-based index funds, smart beta funds utilize rules-based methodologies to emphasize specific investment factors. These factors can encompass various traits such as size, value, momentum and quality. Essentially, these are characteristics of stocks that have been shown through empirical research to influence equity returns over time.
These targeted approaches are not random; they are based on decades of financial research. “For example, the iShares Global Equity Factor ETF (GLOF) is a one-size-fits-all ETF that puts an additional focus on multiple factors like profitability, momentum and size,” says Eric Croak, president at Croak Capital. “This ETF does the job of creating a well-balanced portfolio and should be a long-term option for every beginning investor.”
A certificate of deposit, or CD, is a type of savings product offered by banks and credit unions. When investors buy a CD, they are entering into an agreement to deposit a sum of money for a predetermined duration. In return for this commitment, the bank guarantees the safety of the principal amount and provides a fixed rate of interest. Compared to regular savings accounts, CDs have a “term” that can range from as short as a few months to several years.
Typically, the longer the term, the higher the interest rate an investor might receive. Today, investors can get a one-year CD with rates as high as 5.5%. “However, if you want a little more bang for your buck, try a market-linked CD, which don’t have a guaranteed interest rate but are instead linked to a popular index like the S&P 500,” Croak says. “They are capped on the upside but still guarantee against loss if the market falls, making them a great option for people who want higher returns with guaranteed safety.” Keep in mind, the more complex an investment is, the more research you should do on it, and market-linked CDs have downsides of their own like the ability to be called, returns that are taxable as interest, stock market risk and more.
Investors looking to keep cash safe in a brokerage account in anticipation of buying opportunities can utilize a money market fund to earn interest on it. By investing in a money market fund, investors are essentially placing their money in a pool that invests in short-term, high-quality securities like Treasury bills and commercial paper while receiving a decent yield. “Current money market yields are over 5%, which is higher than we have seen in a long time,” Cunnison says.
However, it’s crucial to note that while money market funds aim to be stable and low-risk, they are not entirely devoid of risk. They strive to maintain a fixed net asset value of $1 per share, but there’s no absolute guarantee that this will always be the case. Still, due to stringent regulatory oversight and the nature of their investments, money market funds are generally considered very low-risk, especially when compared to the volatility of stock and bond funds.
For long-term investors seeking a hands-off approach to retirement planning, target-date funds can be a great way to invest $5,000. These funds are designed with a specific retirement year in mind, such as 2040 or 2050, which is usually indicated in their name. The fund’s asset allocation strategy automatically adjusts over time, transitioning from a more aggressive mix of assets in its early years to a conservative blend as the target date approaches.
Initially, a target-date fund’s portfolio might be heavily weighted toward equities, which generally have the potential for higher returns but come with increased volatility. As the years progress and the target date nears, the fund gradually shifts its holdings, increasing the proportion of bonds and other conservative assets to prioritize capital preservation. Investors can select a fund closely matching their expected retirement date, and the fund takes care of asset allocation and periodic rebalancing.
While $5,000 might not grant you direct ownership of a brick-and-mortar rental property, the world of real estate is still very much within reach. Real estate investment trusts, or REITs, can offer a viable pathway into this asset class without the hefty capital requirements of direct property ownership. These are companies that own, operate or finance income-generating real estate across various sectors such as retail, residential, industrial, office and health care.
When investors buy shares of a REIT on a stock exchange, they essentially become shareholders in the REIT’s property portfolios. By law, REITs are required to distribute at least 90% of their taxable income to shareholders in the form of dividends, which can offer steady income that mimics the rent one would expect from owning a rental property, but without the responsibilities of being a landlord. Using a REIT ETF can offer further diversification by granting exposure to numerous different REITs.
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