Got five grand burning a hole in your pocket? Here’s how to put it to work.
Holding cash these days is a losing proposition. With inflation figures hitting an 8.6% increase year over year in June, every dollar in your pocket is worth less and less as time goes on. Instead of stuffing your cash in a mattress to lose value over time, consider investing it instead. With markets down heavily recently, investors can find a variety of great assets, whether they be stocks, bonds or alternative investments, on sale at bargain prices. For younger investors in the accumulation phase, a bear market is one of the best times to start a long-term investment portfolio. Buying one of these assets can be a great way of warding off inflation and even making a decent return on your investment. Here are seven of the best ways to invest $5,000 in 2022 for short- and long-term investors alike.
Series I savings bonds
Series I savings bonds are U.S. government-issued fixed-income securities that pay an interest rate based on two factors: a fixed rate, and a variable inflation-based rate. When inflation runs high (like right now), I bonds pay a juicy yield. Case in point: The annual interest rate for I bonds issued between May 2022 and October 2022 currently sits at a whopping 9.62%. These bonds are virtually “risk free,” as they’re backed by the full faith and credit of the U.S. federal government. Investors can hold I bonds for up to 30 years and can cash them after one. However, if you cash an I bond before five years, you lose the last three months of interest payments. The downside to I bonds is that you can only buy $10,000 total per calendar year electronically via TreasuryDirect.
Warren Buffett‘s flagship company, Berkshire Hathaway, is an excellent core portfolio holding for new and experienced investors alike. The company can be thought of as a fund at this point, due to its sizable investments in blue-chip U.S. stocks like Apple Inc. (AAPL), Bank of America Corp. (BAC) and Coca-Cola Co. (KO). Year to date through July 7, Berkshire Hathaway is only down 6.6% compared to the 18.1% loss in the S&P 500, a testament to its resiliency and Buffett’s value investing philosophy. Berkshire shareholders have traditionally enjoyed market-beating performance over long periods of time, especially when Buffett puts Berkshire’s cash reserves to work during buying sprees. Investing in Berkshire gives exposure to a portfolio of Buffett’s hand-picked stocks, allowing investors to reap the benefits of his long-term value investing philosophy.
Vanguard S&P 500 ETF (VOO)
VOO is endorsed by Buffett as the investment of choice for his estate upon his passing, and for good reason too. The index that it tracks (the S&P 500) is notoriously difficult for professional investors and hedge fund managers to beat over the long run and is often used as a barometer for overall U.S. stock market performance. Its roughly 500 constituents are highly reputable U.S. large- and mid-cap companies, which are screened by the S&P committee before admission to the index. Over various rolling 20-year periods, the S&P 500 has delivered a 10% compound annual growth rate before inflation. The S&P 500 is a great long-term investment, and VOO allows investors affordable passive exposure at an extremely low expense ratio of just 0.03%. This works out to $3 on a $10,000 portfolio annually.
Vanguard Total World Stock ETF (VT)
VOO is a great long-term pick, but the ETF only tracks around 500 large-cap U.S. stocks. Long-term passive investors may want to diversify their holdings internationally by buying VT, which tracks the FTSE Global All Cap Index. VT holds more than 9,500 large-, mid- and small-cap stocks from every sector, covering the U.S., international developed, and international emerging, markets. While VT may be volatile as an all-equity holding, it is as safe and diversified as equity ETFs get. Investors who buy and hold VT ensure they receive the world stock market’s average return at all times. With VT, there’s no need to lose sleep worrying about which country, market-cap size, or sector will outperform. VT is slightly more expensive than VOO at an expense ratio of 0.07%.
A great way to put that $5,000 on autopilot for a prosperous retirement is via a target-date fund. These funds offer a complete portfolio with a single ticker and are tailored to investors with different time horizons. For example, the Vanguard Target Retirement 2065 fund (VLXVX) is designed for investors born between 1998 and 2003 with about 45 years until retirement, with a 90%/10% stock/bond split. Investors who buy a target-date retirement fund don’t have to worry about rebalancing assets as the fund manager handles that. As investors age, the target-date fund automatically reallocates its proportions of stocks and bonds to reduce risk, making it more conservative as investors approach retirement. The minimum investment for a Vanguard target-date fund is a mere $1,000, making it accessible to most investors.
Certificates of Deposit (CDs)
A great risk-free way of investing money for short-term needs is via a certificate of deposit, or CD. These are instruments offered by banks and credit unions that pay interest in exchange for a lump-sum deposit that cannot be withdrawn for a period of time. For example, a bank may offer a 2-year CD paying a 2% annual percentage yield, or APY. As interest rates rise, CD rates are likely to become more attractive too. Many banks also offer promotional rates, so it is crucial to shop around for the best rate. A great reason to use CDs is to invest money for predictable short-term goals, such as a vehicle, tuition, or home down payment in the next year or two. As bank products, CDs are insured by Federal Deposit Insurance Corp., so you don’t have to worry about losing your money.
Money market accounts
Investors who want the monthly interest payments of CDs but without the pesky lock-up periods can consider money market accounts as an alternative. Money market accounts pay a lower APY, but do not lock your money up, allowing you to withdraw your money if needed. Some banks offer debit card and check-writing services with their money market accounts, while others have no minimum deposit requirements or monthly fees, so ensure you shop around. Money market accounts are a great place to store three-to-six months of emergency funds while earning interest. Current money market rates are capped at 1.58% APY, but generally range from 0.75% to 1.25%, depending on the bank and any ongoing promotions.
7 of the best ways to invest $5,000:
— Series I savings bonds
— Vanguard S&P 500 ETF (VOO)
— Vanguard Total World Stock ETF (VT)
— Target-date funds
— Certificates of deposit (CDs)
— Money market accounts
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Update 07/08/22: This article was published at an earlier date and has been updated with new information.