Saving $1,000 is a big deal. Investing it for the first time is an even bigger one.
Once you’ve reached this milestone, you might feel excited to watch your investment grow as well as terrified you could lose it all.
But investing doesn’t have to be intimidating, and it’s not as complicated as you think.
Ready to invest your first $1,000? Here’s a guide to making it simple and rewarding.
Ask This Key Question
Before you start weighing all your investment options, start with one question: When do you plan to use the money?
That’s right, it’s not about buying up the trendiest stocks. It’s about choosing the best option based on how soon you plan to spend your money.
This is crucial due to a key factor: risk. A general rule of thumb: the sooner you plan to cash out, the less risky investment you should choose.
A strategy based on your risk tolerance and time horizon will better protect you against losses.
Let’s look at short- and long-term scenarios and options for both.
Minimize Risk for Short-Term Investing
If you’re looking to invest for a year or two with a short-term goal in mind, like a down payment on a car, you likely don’t want to risk losing money.
In this case, options other than the stock market may be best, including:
- Certificates of Deposit. These often come with a guaranteed return over a certain term combined with very little risk of loss since the FDIC backs them.
- Treasury Direct I Savings Bonds. These are bonds issued by the U.S. government. The current rate on these bonds is 1.18% per year, and it’s possible this will increase. They’re also considered very safe against loss.
- GE Interest Plus. Rates for these accounts are about 1% on $1,000 invested, which is higher than many savings accounts offer today.
Short-term options are low risk but also offer lower returns.
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This is a tradeoff compared to the risk of losing a big chunk of your investment in the stock market and no longer being able to make your car down payment.
Focus on Growth for the Long Term
Long-term investing — over decades, rather than just a few years — is a whole different ballgame. The most common long-term case is saving for retirement.
When you’re young, you have a relatively long investment time-horizon increasing your ability to take risk and weather the ups and down of the market over many years.
Rather than the conservative options above which return only about 1% annually, you’re now looking to create an investment portfolio to deliver you the best long-term performance possible .
Asset allocation is the single most important decision you can make when constructing your portfolio.
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Studies show that over 80% of a portfolio’s variance over time is due to its asset allocation. Typical asset allocation for a younger person saving for retirement might include just three asset classes: $600 in U.S. stocks, $200 in international stocks and $200 in bonds or equivalents.
How much to invest in each should be determined by your willingness to see your portfolio rise and fall in value as you head to retirement. Free tools like Jemstep’s Portfolio Manager can help you find an asset allocation strategy that’s custom-tailored to your needs.
Next you need to evaluate and select the vehicles that are best suited to deliver strong results. A good place to start is “pooled vehicles” like mutual funds and exchange traded funds (ETFs).
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Pooled vehicles reduce the amount of time you have to spend researching individual stocks, and help you diversify and spread the risk.
With $1,000 to invest, a good place to start is with low transaction cost index ETFs (Exchange Traded Funds) as they are tax efficient and have low operating expenses.
You can also find ETFs with no transaction fees at brokers such as Charles Schwab, Fidelity or Vanguard.
When investing for the long-term in the stock market, keep these considerations in mind:
- Use retirement accounts for tax advantages. Investing in a Roth IRA means your money can typically be withdrawn tax free in retirement. These accounts can be created in minutes with nearly any brokerage firm like Charles Schwab or Vanguard.
- Monitor investments, but not too closely. There’s a misconception, especially among first-time investors, that you must be actively watching the stock market constantly. This just isn’t the case. Your initial $1,000 does require some attention, but this could simply be on a monthly or yearly basis. As you invest more and your situations changes, the complexity of managing increases and you may want to use a tool like Jemstep Portfolio Manager to help guide your investments strategy and monitor and adjust your portfolio on an ongoing basis.Investing your first $1,000 is exciting, but a realistic approach will serve you best no matter how long you plan to let your money grow.
- Before careful of the following, especially when you’re just getting started:
- Buying individual stocks. This often isn’t the best way to get started. Picking stocks is more complicated and often riskier, as well. With only $1,000, it’s harder to get good bang for your buck while still diversifying your holdings.
- Funds with high expenses. Mutual funds get a lot of buzz, but if you’re not careful, they can eat away at your earnings with high expenses.
- “Too good to be true” investments. The goal isn’t to turn your $1,000 into millions. Don’t chase pipe dreams of multiplying your money many times over with risky investments or borderline scams that make unrealistic promises.
Maybe most importantly, don’t wait!
The earlier that you invest, the more time your money can spend growing. Getting started is more important than finding the perfect fund or stock.
What is your strategy for investing your first $1,000?
Kevin Cimring is CEO of Jemstep, an online investment advisor that helps people lock in more money for retirement. Using patented technology and proven portfolio management methodologies, Jemstep tells users exactly what to buy and sell to maximize their returns without undue risk, avoid high fees, and reduce taxes. Jemstep’s easy-to-use website takes the complexity, difficulty, and anxiety out of investing. A Registered Investment Advisor with the SEC, Jemstep is led by a team of experts with over 100 years’ combined experience in financial management and technology innovation and development. Learn more at Jemstep.com.