The most important thing you can do when it comes to investing is start. If you’re new to investing and don’t know where to start, don’t worry — you’re not alone. You may know you should invest but don’t know where to invest.
If I had to start from scratch, here’s how I’d invest $5,000.
Invest in index funds to achieve diversification
One of the key pillars of investing is diversification. “Don’t put all your eggs in one basket” is a classic saying that applies to many aspects of life, and investing is no exception. Luckily for investors, investing in index funds is a great way to achieve instant diversification. Instead of researching and investing in companies from varying sectors, you could invest in a fund and accomplish diversification with a single purchase.
With $5,000, I would focus on four index funds to cover my bases. To begin, I’d choose an S&P 500 fund as the bulk of my purchase. The Vanguard S&P 500 ETF (NYSEMKT:VOO) is low-cost (0.03% expense ratio) and consists of 507 companies that cover sectors ranging from technology, financials, energy, real estate, healthcare, and much more.
The S&P 500 ensures access to companies with large market caps, which generally comes with a bit more stability. However, with this stability comes less growth potential because the companies are usually older and more established.
To get access to companies with higher growth potential — although it likely comes with more risk — I would invest in both a small-cap and mid-cap fund. The Vanguard Small-Cap ETF (NYSEMKT:VB) and Vanguard Mid-Cap ETF (NYSEMKT:VO) are both low-cost (0.05% and 0.04% expense ratios, respectively), and combined with the S&P 500 ETF, cover companies ranging all sizes.
My final investment would be into a fund consisting of international companies. The Vanguard Total International Stock ETF (NASDAQ:VXUS) consists of companies outside the U.S., with roughly half being in emerging markets and the Pacific, 40% being in Europe, and the rest in North America and the Middle East.
Between those four funds, I’d be investing in companies spanning all sectors, market cap, and geographic regions.
Use dollar-cost averaging
If you find yourself in a situation where you’re thinking about investing a lump sum of money, you could likely benefit from embracing dollar-cost averaging, which involves investing set amounts at regular intervals. In this case, instead of investing $5,000 all at once, it could be broken down like in the following way (preferably on the same day each time):
- Quarterly: $5,000/Four quarters = $1,250 each purchase
- Monthly: $5,000/Five months = $1,000 each purchase
- Weekly: $5,000/10 weeks = $500 each purchase
The frequency and amount of each investment isn’t as important as making sure you’re consistent and making regular purchases.
Slow and steady wins the race
More than anything, I would make sure my ultimate goal isn’t to hit a home run on a single investment. Instead, I’d want to make sure my investments were diverse — with a chance for high growth potential — and shielded as much as possible from single events that could take a hard toll on my portfolio. Remember: Time in the market is more important than timing the market.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.