Deciding where to invest your money isn't just about the amount you have at your disposal; it's a personal decision that requires holistic introspection into your financial circumstances.
Before diving into investment options, it's crucial to assess your risk tolerance. Ask yourself how much of a decrease in your investment you can withstand without resorting to panic selling or losing sleep. This assessment is foundational, as it guides the level of risk you're comfortable taking on.
Equally important is understanding your investment objectives. What do you hope to achieve with this investment? Whether it's saving for a down payment on a house, funding a child's future tuition or bolstering your retirement savings, your goal will shape the investment strategy you adopt.
Your investment time horizon is another critical factor to consider. The amount of time until you need to liquidate your investment can significantly influence the types of assets that are suitable for you. Whether you're looking at a few months, years or decades before you need to cash out, each time frame has implications for your investment choices.
These considerations are universal, whether you're investing $500, $5,000 or $50,000. By taking the time to reflect on your risk tolerance, objectives and time horizon, you can make informed decisions that align with your financial goals and personal circumstances.
For those who've diligently considered these steps and are ready to invest $5,000, there are several avenues to explore. Here are seven of the best ways to invest $5,000:
One of the most straightforward methods to potentially grow a $5,000 investment over the long term is by investing in a fund that tracks the S&P 500.
This index serves as a benchmark of 500 large-cap U.S. stocks, chosen by a specific set of rules and a committee to accurately represent the U.S. economy, covering about 80% of the market.
As a market-capitalization-weighted index, larger stocks are given more prominence, meaning the index's performance is heavily influenced by the largest companies within it.
The challenge of outperforming the S&P 500 is also well documented; the latest S&P Indices Versus Active, or SPIVA, report indicates that 92.2% of all U.S. large-cap funds failed to beat the index over the past 15 years.
Low-cost exchange-traded funds, or ETFs, like the Vanguard S&P 500 ETF (ticker: VOO) and mutual funds like the Vanguard 500 Index Fund Admiral Shares (VFIAX) allow you to invest in the S&P 500 index at expense ratios as low as 0.03% and 0.04%, respectively.
"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."
Investors with a high risk tolerance looking for a more aggressive, growth-oriented investment can opt to track the Nasdaq-100 index instead of the S&P 500. This can be done via the Invesco QQQ Trust (QQQ), which charges a 0.2% expense ratio.
"QQQ tracks the Nasdaq-100, which provides exposure to the 100 largest non-financial companies listed on Nasdaq, and it has provided exposure to innovative, technologically focused companies for nearly 25 years," says Paul Schroeder, QQQ equity product strategist at Invesco. "It is the second most traded ETF and fifth largest ETF in the world, accounting for 27% of all large-cap growth ETF assets."
Thanks to an overweight to tech stocks like Microsoft Corp. (MSFT), Apple Inc. (AAPL), Nvidia Corp. (NVDA), Alphabet Inc. (GOOG, GOOGL) and Amazon.com Inc. (AMZN), QQQ has recorded strong historical performance. Over the past 10 years, QQQ has returned an annualized 18.4%. It is a highly liquid ETF, with excellent trading volume, low bid-ask spreads and has an options chain available.
There's also the Invesco Nasdaq 100 ETF (QQQM), which is basically QQQ with a lower price per share. "QQQM also tracks the Nasdaq-100 index and was introduced in October of 2020 with the buy-and-hold investor in mind," Schroeder says. "The ETF has a 0.15% expense ratio, lower than the 0.2% expense ratio of QQQ, which allows investors to access the same strategy as QQQ but at a lower cost."
For investors whose portfolios are predominantly focused on U.S. assets, allocating $5,000 toward international index funds can serve as an effective gateway to global diversification. Opting for either ETFs or mutual funds focused on international markets offers a strategic hedge against periods of U.S. economic stagnation or weakness in the U.S. dollar.
A historical example of this is the so-called lost decade from 1999 to 2009, during which U.S. markets underperformed while international markets, particularly in developed and emerging countries, picked up the slack. Although the U.S. market has exhibited strong performance over the past decade, this past success does not necessarily predict future outcomes.
Investors looking to diversify internationally have several choices. For exposure to more stable, established economies, one might consider funds focused on developed markets such as Japan, the United Kingdom, Germany and France. A great example is the iShares Core MSCI EAFE ETF (IEFA).
Alternatively, for potentially higher growth, albeit with higher risk, emerging markets such as China, India, Brazil and South Africa offer vibrant opportunities. An ETF like the iShares Core MSCI Emerging Markets ETF (IEMG) provides this exposure for a 0.09% expense ratio.
There are also funds that blend exposure to both developed and emerging markets, such as the Vanguard Total International Stock Index Fund Admiral Shares (VITAX). These funds can be appealing for investors seeking broad international exposure without the need to select between developed and emerging market funds specifically.
With $5,000 at your disposal, you can navigate a middle path between broad index fund investing and the more targeted approach of stock picking through sector ETFs.
The market is segmented into a total of 11 Global Industry Classification Standard, or GICS, sectors, including communication services, consumer discretionary, consumer staples, energy, financials, health care, industrials, information technology, materials, real estate and utilities.
Each sector reacts differently to economic cycles. For instance, the consumer discretionary sector often thrives during economic upturns as consumer spending increases, while the utilities sector tends to provide stable returns even during economic downturns due to the essential nature of its services.
"Using a sector ETF as a satellite for your core investments may enable you to capitalize on trends and opportunities within a particular sector that you believe could outperform the broader market," says Michael Schulman, partner and chief investment officer at Running Point Capital Advisors. "Sector selection involves more work and input on your part but allows you to tailor your investments to align with your expectations for specific industries."
Many ETF providers have curated lineups of sector ETFs designed to target these distinct market segments. State Street, for example, offers its suite of 11 "Select Sector" ETFs, each tracking a different sector within the S&P 500. Vanguard also provides 11 sector ETFs, which include a broader mix of companies encompassing not just large-cap stocks but also mid- and small-cap companies.
"Thematic ETFs invest in companies that are aligned with specific trends or themes, such as artificial intelligence, cybersecurity or clean energy," says Pedro Palandrani, vice president and director of Research at Global X ETFs. "These trends are often long-term in nature, which means that thematic ETFs can offer investors exposure to potential growth opportunities."
The vast array of thematic ETFs available can help investors express an investment thesis for nearly any idea that crosses their mind. For example, there are now thematic ETFs for investing in the nuclear industry, such as the VanEck Uranium + Nuclear Energy ETF (NLR) or even waste disposal companies via the VanEck Environmental Services ETF (EVX).
"While thematic ETFs in the U.S., E.U. and elsewhere around the world have been negatively impacted by an uncertain macro environment, we believe that the adoption of these strategies is in the very early stages," Palandrani says. "Just five years ago, the aggregate assets under management in thematic U.S.-listed and UCITS ETFs was around $25 billion – today, that sits at $110 billion."
However, there are some risks to be aware of before investing. Compared to sector ETFs, thematic ETFs tend to be more narrowly focused and have a concentrated portfolio. They also tend to be expensive. For example, while the Technology Select Sector SPDR Fund (XLK) charges 0.1%, the Global X Artificial Intelligence & Technology ETF (AIQ) charges 0.68%, almost seven times higher.
Investing $5,000 in REITs offers a convenient way to gain the benefits of real estate exposure within a brokerage account. These are publicly traded companies that own, operate and finance income-generating real estate, and trade like regular stocks.
A key regulation governing REITs requires that they distribute at least 90% of their taxable income to shareholders in the form of dividends. This requirement often results in REITs providing steady, above-average distributions to investors, making them an attractive option for income-focused portfolios.
One significant advantage of investing in REITs is the ability to target specific sectors within the real estate market. For instance, investors can gain exposure to the telecommunications sector through American Tower Corp. (AMT), tap into the commercial office with Boston Properties Inc. (BXP) or invest in the self-storage industry with Public Storage (PSA).
Finally, for those who see $5,000 as a minor component of a broader, diversified portfolio, there exists the unique opportunity to align your investment with the strategies of some of the world's most legendary investors through publicly traded funds, partnerships or companies.
This approach allows investors to leverage the expertise and track record of renowned market figures. Examples of such opportunities include investing in Warren Buffett's Berkshire Hathaway, Carl Icahn's Icahn Enterprises L.P. (IEP) and Bill Ackman's Pershing Square Holdings (OTC: PSHZF).
This method of investing offers several benefits, including the potential to outperform the market by leveraging the expertise and strategic foresight of these investment titans.
However, it's important to recognize the risks involved. As always, investing in a single stock or partnership carries inherent risks, including volatility and the potential for significant losses.
Moreover, many of these legendary investors are advancing in age, which introduces uncertainties regarding the continuity of their investment strategies and future management.
Finally, for investments structured as limited partnerships, such as Icahn Enterprises, investors need to be mindful of the tax implications, which can differ significantly from traditional stocks.
