Common financial wisdom says that when you receive a windfall, you should save and invest it, rather than simply spend it.
Common sources of financial windfalls include bonuses at work, tax refunds and inheritances. This type of “found money” can pay dividends many times over if you prudently invest it. Fortunately, in this era of online brokerages and zero-commission trading, you have more options than ever to invest even smaller amounts, like $5,000. Here are some of the best given current market conditions.
S&P 500 Index Fund
As of June 4, the S&P 500 index was down close to 14% year-to-date. Historically speaking, the S&P 500 index has always come back from selloffs to put in new highs, even after devastating bear markets. While the index may have further to fall in 2022, those with a long-term investment horizon are likely to see higher prices in the future.
There are numerous exchange-traded funds that track the S&P 500 and have extremely low expenses, and at many brokerages you can even buy fractional shares of these ETFs with your $5,000.
NASDAQ Composite Index Fund
If you’re a believer in the recovery of the S&P 500 index and have a higher risk tolerance, picking up shares of the NASDAQ Composite index ETF could be a good long-term play as well. Although more volatile than the S&P 500 index — as exhibited by its year-to-date drop of over 23% — it also has a higher potential for growth. Over the past five years, the NASDAQ Composite has posted gains of about 90%, vs. the more pedestrian 68% for the S&P 500.
If you’ve got just $5,000 to invest, using the services of a robo-advisor might be your best option. For a small annual fee that is typically around 0.25% of your total assets, professional money managers will allocate your funds across various ETFs, according to your investment objectives and risk tolerance.
This can give you exposure to a wide variety of diversified assets with relatively little money. In the words of William Whitt, a strategic advisor at consulting firm Alte-Novarica Group, “If you don’t have a lot of money, you’re in your 20s and 30s, the portfolios are pretty damn good.”
In times of market uncertainty, experts often advise to buy high-dividend stocks, as they tend to be more defensive. As Daniel Milan, managing partner of Cornerstone Financial Services told CNBC Select, “Growing dividends from high-quality companies can make a significant positive impact on a portfolio.”
Although the upside may not be as great as with some more aggressive bets, high-dividend stocks also can help protect your portfolio from additional downside during a bear market. In addition to being some of the most stable, well-known companies in the world, the high dividends these companies pay make them more desirable in low-return environments.
Fund an IRA or HSA
Sometimes where you put your money is more important than what you choose to buy with it. A $5,000 lump sum is close to the maximum annual contribution you can make to either a health savings account or an IRA.
For both accounts, you can typically qualify for a tax deduction on the amount you contribute. With an IRA, that money grows tax-deferred until you withdraw it in retirement — unless you choose a Roth IRA, in which case you won’t be able to deduct your contributions but you will be able to withdraw money tax-free in retirement.
With an HSA, in addition to deducting your contributions, you also can withdraw your money tax-free when it’s used for qualifying medical expenses. In fact, Ashley Coake, an enrolled agent and certified financial planner, says, “In my opinion, an HSA is better than a Roth because you’re never paying taxes on it.”
One type of investment that may be timely for the current environment is a simple savings account. While accounts from the big banks still may not pay much by way of interest, online savings accounts have been rapidly increasing their payouts in response to interest rate hikes by the Federal Reserve. If the Fed continues to raise rates as anticipated throughout the year and into 2023, rates on online savings accounts may break 2%, all in an FDIC-insured investment. In a time of market uncertainty, temporarily parking your money in a high-rate, no-risk account may be a good move.
Sometimes, the best investment available is not something you can buy in the public markets but simply yourself. If you can learn additional marketable skills or become an expert in your field, you can command higher prices in the labor market, which can pay far more over the course of your lifetime than an investment in the financial markets.
Billionaire investor Warren Buffett, the “Oracle of Omaha” and co-chairman of Berkshire Hathaway, recently told shareholders at the company’s annual meeting: “Whatever abilities you have can’t be taken away from you. They can’t actually be inflated away from you. The best investment by far is anything that develops yourself, and it’s not taxed at all.”
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