If you’re just starting out with investing and have $5,000 ready to put into the stock market, where should you invest for solid long-term returns? To find out, GOBankingRates spoke with Rachel Burk, a financial advisor with Offit Advisors.
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Burk’s advice to new investors is to stick to the fundamentals first. Focus on established, profitable companies with track records rather than chasing hot trends you don’t fully grasp.
“If you are just getting started, you want to acknowledge your limitations,” Burk said. “Most big mistakes in the market come from people thinking they know what they are doing after reading one article or watching one video and taking that advice. But there are ways to let your first investment be a success without hours of research.”
It can be tempting for new investors to try to buy stocks at the lowest point and sell at the peak, but predicting market swings is extremely difficult, even for professionals. That is why it’s advisable to take a long-term approach.
Determining your ideal allocation between stocks and bonds is the first step you should take. Stocks offer higher long-term growth potential but with significant short-term price swings. Bonds provide more stable returns but lower yields.
“For your first investment,” Burk said, “figure out how much money you want in stocks, which will grow faster than bonds but be more volatile, and how much you want in bonds, which have a lower expected return but more stable growth.”
Conservative investors may want a higher bond allocation, like 60% bonds and 40% stocks. Those with higher risk appetite may prefer 70% or 80% in stocks and the rest in bonds. The right asset mix depends on you and your specific situation. Your risk tolerance should guide how you divide your funds.
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When you’ve decided on your asset allocation, it’s time to select appropriate funds.
“Pick a fund or ETF from a well-known company such as Vanguard or iShares,” Burk said, “and make sure the ETF or fund has the word ‘total’ in the name.”
Burk explained that the word “total” in the name signals that the fund or ETF is buying stocks or funds from many different asset classes — such as small, medium and large-cap companies — and even different investing styles, such as growth or value.
“Using the word ‘total’ means you are able to spread your money across these different areas of the market, which diversifies your investment so that even if one area doesn’t do well, the loss is minimized,” she said.
