Index Funds Get Instant Diversification To Leading Stock Indices
Another way to gain exposure to the stock market is through an index fund. In fact, this option might be more suitable for beginners looking for the best $5,000 investments. The reason for this is that index funds are tasked with tracking a specific segment of the stock exchange, meaning that there is no requirement to research or select individual companies.
An example of a popular index fund is the S& P 500. This index fund tracks 500 large US companies at various weights. This means that larger companies contribute a higher percentage of the index fund portfolio and vice versa for those with a smaller market capitalization. The logic behind this is that larger companies have a greater impact on the broader US economy.
For example, some of the largest companies contributing to the S& P 500 include the likes of Tesla, Amazon, Apple, Microsoft, and Alphabet . Nonetheless, an investor can allocate a single investment to the S& P 500 and instantly gain exposure to 500 different companies. Furthermore, the index fund will be rebalanced every three months.
This means that the weighting of each company within the S& P 500 will be adjusted, based on updated market valuations. Moreover, if a company losses too much value, it might be replaced by another stock. In addition to the S& P 500, there are many other index funds that remain popular with passive investors.
Open A Brokerage Account And Start Investing
If you want to jump right into investing, theres no better way to start than with a brokerage account. There are a number of brokerages that dont require minimums, like Charles Schwab, E*TRADE and Merrill Edge. That means $5,000 will be plenty to get your investment portfolio started.
In a typical brokerage account, you can invest in a wide range of securities. These can include individual stocks and bonds, ETFs, mutual funds, options and more. This makes brokerage accounts much more customizable, as retirement accounts often limit your investment options. Heres a breakdown of a few types of investments you can look into.
My Top Pick For The Next Two Decades
Of all the current TSX-listed stocks in my portfolio, Shopify is the one that excites me the most. I believe that the next two decades could reward shareholders nicely if the company stays on track. Since its founding, Shopify has transformed from a small tech startup to one of the biggest e-commerce companies in the world. Its estimated that more than one-million merchants use Shopify. This includes names such as Pepsi, Netflix, and Staples.
Shopifys business runs on recurring payments. It receives revenue in two main ways. First, merchants can subscribe to different packages, providing them certain features that can be used to optimize their online stores. Over the past five years, that recurring revenue stream has grown at a CAGR of 35%.
Second, Shopify takes a percentage of each sale transacted on its platform. In other words, getting more merchants to use Shopifys platform would be very beneficial for the company. It aims to continue attracting new merchants by increasing the visibility of its stores and offering innovative solutions.
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Think About Certificates Of Deposit
Again, its all about short-term access to cash. If youre investing for less than five years, then consider placing your money in a CD with a maturity date that ends in five years.
CDs currently earn a small amount of interest, however, any interest does add up. The downside is that once you lock into a CD with a specific maturity date, youre committed to that.
Money market accounts, on the other hand, offer more liquidity.
For people who are already experienced savers, Solari notes that there are more investment choices to consider. I have a five-year rule when it comes to investing, he says. If you need the money within five years then you ought to invest it into a liquid savings account.
Stocks To Buy: Alphabet
Next up on this list of stocks to buy is Alphabet. Communications services stocks are the next biggest component of the S& P 500, making up 10.8%. Of course, youve probably already concluded that our imaginary investor cant buy an entire share of GOOG stock with just $500. Thats true but its also no problem. Fractional share ownership is common. In this case, $500 buys you approximately one-sixth of a share for this starter portfolio.
Remember, though, Google shares have nearly tripled over the past three years. Just about no one expects it to reverse course. So, that $500 will grow.
There are thousands of narratives and directions one could discuss related to this company, but risks are quite relevant. Tech giants like this one are drawing more and more attention for the consolidation of power they exercise.
The risk of material regulations affecting this company looks to be increasingly likely, according to certain sources. That would suggest perhaps shying away from GOOG stock. However, Morgan Stanley strategist Michael Zezas believes the base case will likely result in only a modest increase in oversight for the company.
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Take Advantage Of High
Risk level: LowGood for: Low-risk, short-term investing
If you want a shorter-term investment with minimal risk, consider depositing it into a high-yield savings account. Just keep in mind that current rates on high-yield savings accounts are pretty low.
Online savings accounts like CIT Bank’s Savings Builder tend to offer higher interest rates than traditional savings accounts.
This allows you to earn regular returns with virtually no worry about losing money. However, like CDs and bonds, the rate of return can be lower than other types of investments, such as stocks.
Why Stocks Are Still The Best Option For Young Investors
Here’s the thing about a lot of the investments young millionaires own: Everyday people likely don’t have enough money to buy them. “Things like private equity, hedge funds, direct-owned real estate and material amounts of crypto are examples, and the minimum investments for entry are often prohibitive,” says Brady.
Even if you have enough money to get in the door, there’s little to suggest you’d be better off. For one thing, these investments often come with a high level of risk that everyday investors may not be equipped to handle.
You needn’t look further than recent turmoil in the crypto market to see how fortunes can be rapidly lost on alternative investments. Even something seemingly steady, like owning rental properties, can hurt your finances if things go wrong.
“Sure, rents are income, but that’s not guaranteed,” says Nicholas Bunio, a CFP in Downingtown, Pennsylvania. “And I’ve seen it with my own clients where they get way in over their head in real estate, ultimately leading to lost money, which set them back years.”
Plus, many investments favored by the wealthy come with high fees, which can be a major drag on returns.
Take it from Warren Buffett: “When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.”
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Before You Start Investing
Before you start investing, make sure your finances are in good shape. Here are a few things you’ll want to focus on before growing your wealth.
Pay down your debtsIf you have existing debt with a high interest rate , it’s best to pay that down first.
Any interest that high can easily cancel out what you earn from investments. On the other hand, debt with low interest rates and a fixed term may not be a cause for concern. Be sure to review your existing debts first.
This is an important resource to have in case you lose your job, have a medical emergency, or need some home repairs. Be sure to have an emergency fund set up and well-funded before investing.
Get a retirement plan in placeAsk yourself two questions:
If your employer is matching contributions to your 401 account, you should be taking advantage of them. To avoid leaving money on the table, contribute the maximum amount that your employer will match before investing your $5,000 in other ways.
In addition to a 401, consider other tax-advantaged retirement accounts like a traditional IRA or a Roth IRA.
401 Company Match
Liquidity Of The Investment
The risk of uncertainty always remains there in investments. Some factors are beyond human control and can lead you to liquidate your investment at some point. If the asset you have invested in is highly liquid, you can easily trade it for cash. On the contrary, less liquid assets take more time to sell and liquidate into cash.
What to invest 5000 dollars in depends on the assets liquidity also. High liquidity lets you realise the value appreciation quickly when the assets price changes in the market. You can easily sell it and get higher returns by investing in some other assets.
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Create A Diversified Portfolio Using Buckets
Investment buckets are a strategy to match your investments with anticipated financial needs.
For example, one bucket may be your emergency fund. It’s an account you’ll need to cover short-term income disruptions and large, unexpected expenses. It will need to sit in a short-term bucket, which means an account where it will earn interest and be safe. A high-yield savings account will be the best place for this bucket.
Retirement can be another bucket and will require a long-term investment account that’s likely to produce consistent capital gains over many years. Robo advisors or growth-oriented EFTs held in an investment brokerage account is an excellent location for this bucket.
You may have several intermediate-term buckets. For example, you may have a bucket set up for saving for the down payment on a house. Another may be saving for your children’s college education. An intermediate bucket will include any future financial obligations that will be less immediate than an emergency fund but are needed well before retirement.
You could put medium-term buckets into a taxable investment brokerage account or even with a robo advisor. It should have a relatively lower risk than you might have in a retirement account since the funds will be needed much sooner.
Youre Our First Priorityevery Time
NerdWallet, Inc. is an independent publisher and comparison service, not an investment advisor. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. They are not intended to provide investment advice. NerdWallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. Examples are hypothetical, and we encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Our estimates are based on past market performance, and past performance is not a guarantee of future performance.
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Beat Your Savings Account Rate With Blockfi
Risk level: Medium
The rise of cryptocurrency has been a sight to behold over the last few years, although its definitely not for everyone. Still, BlockFi a cryptocurrency platform makes it easy to use cryptocurrency to earn interest on your savings. In fact, you might be able to use your cryptocurrency to get a return of up to 8.6% APY, and all with no hidden fees.
How It Works: When you open an account with BlockFi and deposit your cryptocurrency, interest is earned daily and paid out monthly. However, the rate youll earn depends largely on the type of cryptocurrency you use for your account. Where Bitcoin pays out 6% APY as of this writing, Ethereum pays out 5.25%.
How to Get Started: All you have to do is open an account with BlockFi and deposit your cryptocurrency. There are no hidden fees or minimum account balances to worry about.
- Earn Interest on Your Savings with Cryptocurrency
Who Its Best For: Cryptocurrency savings accounts are best for crypto investors who planned to buy and hold anyway. If youre going to keep your cryptocurrency for the long run, you might as well get a regular return on your investment in addition to the potential for growth.
|BlockFi Savings Account Pros
|BlockFi charges withdrawal fees if you exceed their free withdrawal limit
|Earn interest on your cryptocurrency balances
|Cryptocurrency can be very volatile as an investment
How To Start Investing In Low
16 of our 22 panelists suggested low-fee index funds as the best way to start investing with $1,000, and the data backs them up. Almost all of them suggested investing through Vanguard. The answer seems clear, but youre not a financial expert, so how can you get started?
Although putting together a balanced online portfolio of Vanguard ETFs is relatively easy to figure out, even for non-finance nerds, there is definitely a learning curve.
If you want all the benefits of low-fee index investing but:
- Youre scared of making mistakes
- You dont have any interest in putting in some time to learn the ropes
- This is the first time youve even heard the term index fund
- Youd just prefer having an expert to do the work for you
Then the easiest way to get started is through a robo-advisor like Betterment.
In fact, Betterment was the most highly recommended robo-advisor by our panelists . Not only is it a simple way to execute the investing strategy suggested by 16 of our 22 panelists, but its 100% automated.
Betterment and other robo-advisors act like an extremely low-fee financial planner except instead of talking to a human advisor, Betterments software algorithms will build a portfolio of low-fee index funds for you.
This means much lower-fees for you compared to traditional financial advisors, which means more money in your pocket.
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Open An Investment Account
An investment account with a major US bank should be sufficient for most of your investment purposes. An investment account is the best place to consolidate all your investment transactions. It’s also an excellent way of keeping track of your investments.
An investment account, whether it’s a trust or individual retirement account , also offers tax benefits. Here are some good options to try:
eToro is among the leading in the world, offering stock and crypto trading. Besides investment options, eToro also has research tools, sentiment data, and .
Interactive Brokers is a multinational brokerage firm that brokers , , stocks, futures options, funds, bonds, and . Investors only need to fund their account with $100 to get started.
eOptions is a brokerage firm that offers the latest and best in digital options trading. With charges of $0 per trade, eOptions is best for advanced traders or international investors who require and prefer .
The available tradable securities on the platform include options, ETFs, mutual funds, bonds, and stocks.
Coinbase is ideal for crypto trading since it’s a secure platform for buying, transferring, storing, and selling cryptocurrency. The platform is completely remote-first and doesn’t have a physical headquarter.
Although Coinbase has potentially high transaction fees, it’s best for crypto traders since it supports a large number of currencies.
Invest In Index Funds Through Etfs
If you are new to the stock markets, investing in individual stocks can be overwhelming and risky for you. The reason is that you first have to learn the ins and outs of the stock markets, to get accustomed to them, and to figure out how they work best for you. On top of that, picking the right stocks can be too much. Therefore, investing in index funds through ETFs is an excellent way to get started.
Exchange-traded funds are financial securities that track an index such as the S& P 500 or the NASDAQ 100. The advantage of ETFs over stocks is that they are a bundle of investments and thereby have a more inherent diversification. In buying an ETF, you purchase a basket filled with assets and get broader exposure to sectors and industries compared to buying single stocks. Besides, general market ETFs are usually a low-cost investment.
To get your hands on ETFs, you can use a brokerage firm such asM1 Finance. You can then buy shares of an ETF the same way you would buy stocks. As whole shares of ETFs can get expensive as well, using M1 Finance allows you to purchase fractional shares of an exchange-traded fund and could help kickstart your investment career.
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Invest In Passive Income Opportunities
Instead of trying to make money by working more, why not try making money while working less?
Trading time for money is how most of us earn our incomes, but thanks to passive income opportunities, we can start making more money by investing less time. Sounds like everyones dream, doesnt it?
Fortunately, finding legitimate ways to make passive income isnt as hard as you might think.
Its as easy as renting out your car, spare room, storage space, or office. You can even rent your house through platforms like Airbnb when youre on vacation.
You can also turn any hobby, interest, skill, or knowledge you have into an online course. In reality, making an online course can be turned into a weekend project. Then, after grinding for two days, you have a shiny new product thats ready to be marketed and sold for years to come.