You’re just starting out with investing and have $5,000 ready to put into the stock market. Where should you invest that first $5,000 for solid long-term returns?
To find out, we spoke with Rachel Burk, a financial advisor with Offit Advisors. 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.
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“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. It’s best to take a long-term approach.
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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.
If you were using this strategy for a 60/40 portfolio starting at $5,000, for example, you’d invest $3,000 in a total stock market fund and $2,000 in a total bond market fund. Index funds provide instant diversification by passively tracking an entire index. This takes the guesswork out of picking individual stocks. They tend to have low fees as well.
Burk recommended considering the following funds:
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Vanguard Total Bond Market Index Fund Admiral (VBTLX): Vanguard’s total U.S. bond index fund. Tracks a broad bond index and invests in government, corporate and other public investment-grade bonds.
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Fidelity Total Bond Fund (FTBFX): An actively managed Fidelity fund investing in U.S. bonds across sectors and credit qualities.
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Vanguard Total Stock Market Index Fund Admiral (VTSAX): Vanguard’s total U.S. stock index fund. Provides exposure to the entire American stock market across caps and sectors.
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Vanguard Total Stock Market Index Fund (VTI): The ETF version of Vanguard’s total U.S. stock market index fund. Trades on exchanges like a stock but tracks the total market.
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iShares Russell 3000 ETF (IWV): iShares ETF tracking Russell 3000 index of 3,000 large, mid-cap and small-cap U.S. stocks. Broad exposure to the U.S. equity market.
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Schwab Total Stock Market Index Fund (SWTSX): Schwab’s version of a total U.S. stock market index fund. Tracks the Dow Jones U.S. Total Stock Market Index.
“Another easy way to start is a lifecycle fund or target date,” Burk said. “Pick a fund that has the estimated year that you will retire in the name of the fund. For this investment, you can put in the whole $5,000, since the fund will reallocate your money to more conservative funds or ETFs over time.”
Target date funds offer all-in-one options for beginners. You simply pick a fund with your estimated retirement year in the name, such as a 2060 fund. Over time, a fund like this automatically shifts your money from riskier stocks to more stable bonds as you approach retirement.
This approach makes investing easy for first-timers. With a target date fund, you can put your whole $5,000 into one diversified fund tailored to your chosen retirement date.
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