7 of the Best Ways to Invest $5,000
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:
- S&P 500 index funds.
- International stocks.
- Smart beta funds.
- Certificates of deposit.
- Money market funds.
- Target-date funds.
- Real estate investment trusts.
S&P 500 Index Funds
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."
International Stocks
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.
