The rich had to start somewhere. Forget that some wealthy people are born affluent, won a lottery or had connections - plenty of them started right where you may be now: somewhere near the inglorious bottom. So if you've finally scraped up some extra money, and you don't need to divert it into debt, an emergency fund or a new washing machine, you may want to try your hand at investing.
We asked a handful of financial experts to give their suggestions for investing $1,000, a pittance for a veteran investor but a decent sum for many of us.
But before you consider any of the following ideas, remember, especially if you are a beginner, investing takes time. If you think you might need that $1,000 in a few months, adding more money to your rainy-day fund is the best thing you can do. And you should never invest anything you can't tolerate the thought of possibly losing; after all, investing is a risk. Of course, many people will argue that you're risking plenty if you don't invest. So if you have an extra thousand, consider placing it into the following:
Exchange-traded funds. ETFs have been growing in popularity since they were introduced 20 years ago. Like stocks, ETFs can be bought or sold on an exchange at any time during the trading day. But similar to a mutual fund, an ETF holds a basket of assets, like tech stocks, or, more broadly, the U.S. stock market.
"They provide broad asset-class exposure and do so for a very cheap cost," says Jake Loescher, a financial advisor at Savant Capital Management, a fee-only wealth management firm headquartered in Rockford, Ill. So while an investor with deeper pockets may want to invest in mutual funds, ETFs are fairly accessible to a beginning investor.
Mutual funds. That isn't to say all mutual funds are off the table for someone with a grand to invest, according to Loescher. "Many of the Vanguard Target Retirement mutual funds are easy to set up, even for the unsophisticated investor, and offer this broad asset-allocation exposure at the $1,000 minimum funding standard," Loescher says. "They also offer automatic rebalancing as the individual gets closer to retirement."
Another thing to consider if you're debating between a mutual fund or ETF: whether this $1,000 is a one-time investment or the start of a plan to put money away every month. If you can afford to sock away some money every month toward your retirement, a mutual fund is a good choice (and even better if you're contributing it to an IRA or a 401(k) plan, both of which have tax advantages).
"Most mutual funds have a $1,000 minimum with $25 minimum deposits," says David Nawrocki, a finance professor at the Villanova School of Business in Villanova, Penn.
Certificates of deposit. These are among the safest investments because they are insured by the Federal Deposit Insurance Corp. Because the United States is insuring your money, it's impossible to lose money in a CD. But since there is virtually no risk, there isn't much interest (many of the highest-yielding 1-year CDs currently pay under 1 percent, according to Bankrate.com). There are even some banks that offer no-penalty CDs, meaning if you need to withdraw the money early, you won't get hit with a fee.
"New investors would be wise to start off very conservatively," says Diana Webb, assistant professor of finance at Northwood University, a private university with campuses in Florida, Michigan and Texas as well as countries such as China and Switzerland. "If a new investor experiences a poor market in the early beginnings of investing, then they will be frightened away and very leery of investing."
Still, Webb suggests taking some risks, especially if you're younger. Ideally, she says, you should subtract your age from 100, so if you're 25, 75 percent of your investment can be invested in something a bit risky, such as the stock market. The remaining 25 percent would go into something considered quite safe, such as a CD or a U.S. government savings bond, which is another safe investment with very little reward due to the low interest (the current composite rate on I Savings Bonds is 1.8 percent until October 31; you can buy them from the Treasury at treasurydirect.gov/readysavegrow).
New investors may also want to seek out a financial advisor. Some people understandably abhor the thought of paying fees as they try to make money, but the argument for using one is that a professional is probably going to be far more knowledgeable than a novice - and thus help you make far more money than what you spend in commissions or fees. Generally, you'll pay an annual percentage of your managed assets; usually, it's around 1 percent, although some advisors charge less, and some charge as high as 2 percent. If you're unsure whether a prospective advisor is qualified, you can use FINRA BrokerCheck (brokercheck.finra.org), a search engine that provides information on current and former brokers and brokerage firms registered with the Financial Industry Regulatory Authority.
But what you do with the thousand is as important as what you don't do. For a beginning investor, one of the most important goals should be to keep costs low, diversify and invest in line with your personal risk tolerance.
"It certainly wouldn't make sense for an individual just getting started to invest all in penny stocks, bitcoins or other concentrated positions. These types of investments have much higher speculative risk," Loescher says.
Nawrocki says buying individual stocks isn't a good idea unless you already have a rainy-day fund and retirement savings account. Norma Yaeger, a retired president of two stock brokerage firms, echoes that sentiment.
"Buying a single stock is gambling, and the stock market is not for gambling. It is for sound investments," Yaeger says. "Morningstar.com is a service that rates most [mutual] funds and is a good place to begin to find a good growth fund. The fund must be a no-load fund, which means no commissions charged to investor."
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You'll also want to take a look at the expense ratios, or annual expenses, on mutual funds. You're not only paying for the mutual fund; you pay the cost of operating the mutual fund, which is what the expense ratio measures. It's typically between 1 and 2 percent for actively managed funds and much lower for index mutual funds.
And if you do want to buy stocks, David Kass, a finance professor at the University of Maryland, suggests going with the tried-and-true. As of this writing, Berkshire Hathaway B (BRK-A) shares were going for about $115. Eight shares, he says, would cost you $920, so just under our $1,000 ceiling.
"This enables the investor to become a partner with Warren Buffett, who is considered by many to be the world's greatest investor," says Kass, pointing out that Buffett's company owns 80 companies across numerous industries and has a $100 billion equity portfolio with large stakes in giant brands such as Wells Fargo, Coca-Cola and Procter & Gamble.
In any case, whether you're investing with an advisor or on your own, Yaeger is correct when she says: "The investor must do some homework."
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