Making money with money requires taking on some level of risk.
This is why keeping cash in a checking account earns you little to nothing — you’re trading the potential for growth for the security that comes with virtually no risk of losing your funds, especially with the protection provided by depositor insurance.
However, if you want your money to truly work for you, it needs to be invested in productive assets — ones that generate tangible cash flows by delivering a product or service.
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When you invest in them, you essentially acquire an ownership stake, which should yield returns to compensate you for the risk, either through the appreciation of your share in the enterprise or through periodic payments, such as dividends.
This is the essence of investing: taking an educated risk with your money now in the hope of achieving a higher return later (ideally, one that outpaces inflation). By doing so, you avoid being trapped in the cycle of selling your labor to fund consumption and repay debts.
If you’re unsure of whether you’re investing versus gambling, it’s wise to heed the words of Benjamin Graham, author of “The Intelligent Investor” and regarded today as the father of value investing:
“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
Remember — it’s never too late to start investing. Even with $5,000, there are plenty of responsible, time-tested ways to make money that don’t involve excessive risk or speculation.
Here are seven expert-recommended strategies for investing $5,000:
1. S&P 500 index funds.
2. Nasdaq-100 index ETFs.
3. International stocks.
4. Dividend growth stocks.
5. Sector ETFs.
6. Thematic ETFs.
7. Berkshire Hathaway Inc. (ticker: BRK.A, BRK.B).
1. S&P 500 Index Funds
One of the easiest and most effective ways to invest in a broad swath of over 500 leading American companies is through an S&P 500 index fund.
The S&P 500 is a stock market benchmark, curated by a professional committee that selects and maintains a roster of companies based on criteria like size and earnings. This index is designed to capture around 80% of the U.S. stock market by including companies from all 11 sectors, providing a comprehensive representation of the economy.
When you invest in the S&P 500 via vehicles like a mutual fund or an exchange-traded fund (ETF), your money is spread across all 500 of these underlying companies. This makes you a part owner of these companies, allowing you to benefit from both their share price appreciation and any dividends paid.
This index is home to many large blue-chip companies you may recognize, including Microsoft Corp. (MSFT), Amazon.com Inc. (AMZN), Apple Inc. (AAPL), JPMorgan Chase & Co. (JPM), Chevron Corp. (CVX), Procter & Gamble Co. (PG), Johnson & Johnson (JNJ) and Coca-Cola Co. (KO).
Historically, this approach has proven to be very effective. For instance, if you had invested $5,000 in the SPDR S&P 500 ETF Trust (SPY) when it first launched in January 1993 and held onto it until now, your investment would have compounded at an annualized rate of 10.4% with dividends reinvested. This would have turned your $5,000 into approximately $113,574 with minimal effort or research required.
“In his 2014 letter to Berkshire Hathaway shareholders, Warren Buffett said that when he passes away, the instructions for the trustee for his wife will be to put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund,” says Robert Johnson, professor of finance at Creighton University’s Heider College of Business. “If that idea is good enough for Mr. Buffett, it is good enough for the vast majority of investors.”
2. Nasdaq-100 Index ETFs
The S&P 500 offers broad exposure across the American economy, but what if you wanted to focus specifically on the largest, most innovative companies? For that, the index to track is the Nasdaq-100.
This index is narrower in its focus, zeroing in on the 100 largest companies listed on the Nasdaq exchange, excluding financial stocks like banks. As a result, its top holdings are dominated by leaders in technology and artificial intelligence, such as Microsoft, Apple, Nvidia Corp. (NVDA), Amazon, Meta Platforms Inc. (META) and Tesla Inc. (TSLA).
If you’re looking to invest in the Nasdaq-100, two primary ETFs are designed to track this index: the Invesco QQQ Trust (QQQ) and the Invesco Nasdaq 100 ETF (QQQM).
“QQQ tracks the Nasdaq-100, which provides exposure to the 100 largest non-financial companies listed on Nasdaq, and it has provided exposure to innovative, technologically focused companies for nearly 25 years,” says Paul Schroeder, QQQ equity product strategist at Invesco. “QQQM also tracks the Nasdaq-100 index and was introduced in October of 2020 with the buy-and-hold investor in mind.”
QQQ is more expensive, with a 0.2% expense ratio, or about $20 in fees annually for a $10,000 investment. It trades at a higher price per share and is intended for active traders. On the other hand, QQQM trades at a lower price per share and has a cheaper 0.15% expense ratio, making it more suitable for long-term investors.
3. International Stocks
Sticking to U.S. stocks exclusively is known as “home country bias.” While this approach offers benefits like tax efficiency and familiarity with the companies you’re investing in, it can also limit diversification, leaving your portfolio more vulnerable to domestic economic downturns.
There’s no shortage of high-quality international companies that you’ve likely interacted with or know about — think of global giants like Nestlé SA (OTC: NSRGY), Toyota Motor Corp. (TM), LVMH Moet Hennessy Louis Vuitton SE (OTC: LVMUY) and Shell PLC (SHEL).
Most of these companies can be purchased in U.S. dollars via American depositary receipts (ADRs) or global depositary receipts (GDRs). However, you can also diversify by investing in index funds.
For ETFs, a popular, low-cost example is the iShares Core MSCI Total International Stock ETF (IXUS), which comes with a 0.07% expense ratio and holds over 4,400 stocks from countries like the U.K., Japan, Germany, China, India and Brazil.
4. Dividend Growth Stocks
Some of the most reliable companies to buy and hold are prominent blue chips that have not only consistently paid dividends but have also grown them for years on end.
The obvious benefit here is compounding — the “snowball effect” that comes from reinvesting a steadily growing dividend into more shares, which in turn produce even more dividends over time.
Additionally, investing in dividend growth stocks can be a good way to ensure quality in your portfolio. Generally speaking, mature dividend payers often have robust profitability, solid balance sheets and conservative policies designed to return capital to investors.
A great way to start is by looking at “Dividend Aristocrats.” This is an elite group of stocks within the S&P 500 that have grown their dividends for 25 consecutive years or longer.
Notable household names among the Dividend Aristocrats include Exxon Mobil Corp. (XOM), Chevron, Coca-Cola, Johnson & Johnson, Procter & Gamble, Walmart Inc. (WMT) and McDonald’s Corp. (MCD).
5. Sector ETFs
If you’re looking to strike a middle ground between stock-picking and index investing, you might consider using the “core-satellite” approach with sector ETFs.
This strategy allows you to build a well-diversified core, typically with a broad market index ETF, while reserving a smaller portion of your portfolio for targeted investments in specific sectors where you have conviction and time to research.
For example, you might allocate 90% of your portfolio to an S&P 500 index ETF as the core. The remaining 10% could then be invested in a sector ETF that aligns with your outlook.
Suppose you’re concerned about inflation — an energy sector ETF might be a useful satellite investment. This is because energy companies often benefit from rising commodity prices, which tend to increase during periods of inflation. By overweighting the energy sector, you could potentially hedge against it.
“Using a sector ETF as a satellite for your core investments may enable you to capitalize on trends and opportunities within a particular sector that you believe could outperform the broader market,” says Michael Ashley Schulman, partner and chief investment officer at Running Point Capital Advisors. “Sector selection involves more work and input on your part, but allows you to tailor your investments to align with your expectations for specific industries.”
For this role, consider using State Street’s lineup of “Select Sector” ETFs. These ETFs offer targeted exposure to all 11 Global Industry Classification Standard (GICS) components of the S&P 500 for a reasonable 0.09% expense ratio.
6. Thematic ETFs
The 11 sectors — information technology, health care, financials, consumer discretionary, communication services, industrials, consumer staples, energy, utilities, real estate and materials — are designed to categorize the entire stock market. However, this broadness can sometimes make them too general, depending on your investment goals.
For instance, if you’re interested in the defense industry, an industrials sector ETF might have the defense stocks you’re looking for, but it will also include companies involved in general manufacturing and transportation, which won’t align with your focus. The solution to this challenge is a thematic ETF.
“Thematic ETFs invest in companies that are aligned with specific trends or themes, such as artificial intelligence, cybersecurity or defense technology,” says Pedro Palandrani, vice president and director of research at Global X ETFs. “These trends are often long-term in nature, which means that thematic ETFs can offer investors exposure to potential growth opportunities.”
Using the earlier example, a prospective defense investor can easily access a portfolio of pure-play defense companies via the Global X Defense Tech ETF (SHLD). Similarly, an AI investor can buy the Global X Artificial Intelligence & Technology ETF (AIQ).
“These strategies have gained popularity as they allow investors to capitalize on transformational trends and emerging investment opportunities by focusing on specific themes and investing through an ETF wrapper,” Palandrani says.
7. Berkshire Hathaway Inc. (BRK.A, BRK.B)
If you were to invest $5,000 in a single company, arguably the one of the safest would be Warren Buffett’s conglomerate, Berkshire Hathaway.
Originally a struggling textile mill, the company was transformed by Buffett, along with his late business partner Charlie Munger, into a fortress of numerous brands spanning a vast array of industries.
Notable private companies within its portfolio include Geico, a major auto insurance provider; BNSF Railway Co., one of the largest freight railroad networks in North America; and Dairy Queen, known for its chain of ice cream and fast-food restaurants.
Beyond its private holdings, Berkshire Hathaway also boasts an impressive public stock portfolio, with significant stakes in many blue-chip companies. These include Apple, Chevron, Coca-Cola, Bank of America Corp. (BAC) and American Express Co. (AXP).
From 1996 to the present, shares of Berkshire Hathaway, represented by the BRK.B class, have compounded at an impressive 11.1% annualized rate, compared to 9.9% for SPY.
One of the unique aspects of Berkshire Hathaway is its dividend policy — or rather, the lack thereof. Unlike most large companies, Berkshire does not pay dividends. Instead, Buffett prefers to reinvest the profits back into the business, making it a very tax-efficient holding for long-term investors.
That being said, there are some risks to consider. While Berkshire Hathaway has outperformed the market in the past, there’s no guarantee it will continue to do so in the future. Additionally, Buffett’s advanced age — he’ll be 94 on Aug. 30 — poses a potential risk; although he has carefully planned for succession, his passing could still impact the company’s future direction and investor confidence.
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7 of the Best Ways to Invest $5,000 originally appeared on usnews.com
Update 08/27/24: This story was previously published at an earlier date and has been updated with new information.
