You’re just getting started with investing and have nearly $5,000 to throw at the stock market. Where should you invest your first $5,000 for consistent long-term returns?
To find out, we spoke to Rachel Burk, a financial advisor with Offit Advisors. Burk’s advice to new investors is to stick to the basics first. Focus on established, profitable companies with track records, rather than chasing hot trends you don’t fully understand.
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“If you’re just starting out, you want to accept your limitations,” Burk said. “Most of the big mistakes in the market come from people thinking they know what they’re doing after reading an article or watching a video and taking that advice. But there are ways to make your first investment successful without hours of research.”
It can be tempting for new investors to try to buy stocks at the bottom and sell at the top. But predicting market fluctuations is extremely difficult, even for professionals. It is better to take a long-term approach.
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Set up your asset allocation
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 volatility. Bonds offer more stable returns but lower yields.
“For your first investment,” Burk said, “think about how much money you want in stocks, which will grow faster than bonds but are more volatile, and how much you want in bonds, which have a higher return. lower than expected, but more stable growth.”
Conservative investors may want a higher bond allocation, such as 60% bonds and 40% stocks. Those with a higher risk appetite may prefer 70% or 80% in stocks and the rest in bonds. The right mix of assets depends on you and your specific situation. Your risk tolerance should guide how you allocate your funds.
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Choose your funds
Once you’ve decided on your asset allocation, it’s time to choose the right funds.
“Choose a fund or ETF from a reputable company like 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-, mid-, and large-cap companies — and even different investment styles, such as growth or value.
“Using the word ‘total’ means that you are able to spread your money across these different areas of the market, which diversifies your investment so that even if one area does not perform well, the loss is minimized,” she said.
If you were to use this strategy for a 60/40 portfolio starting at $5,000, for example, you would 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 also tend to have low fees.
Burk recommended the following funds be considered:
Vanguard Total Bond Index Fund Admiral (VBTLX): Vanguard Total US Bond Index Fund. It tracks a broad bond index and invests in government, corporate and other investment-grade public bonds.
Fidelity Total Bond Fund (FTBFX): An actively managed Fidelity fund that invests in US bonds across all sectors and credit qualities.
Vanguard Total Stock Index Fund Admiral (VTSAX): Vanguard’s Total US Stock Index Fund. Provides exposure to the entire US stock market across all capitals and sectors.
Vanguard Total Market Index Fund (VTI): ETF version of Vanguard’s US total stock index fund. It trades on exchanges like a stock, but tracks the total market.
iShares Russell 3000 ETF (IWV): The iShares ETF tracks the Russell 3000 index of 3,000 US large-cap, mid-cap and small-cap stocks. Broad exposure to the US stock market.
Schwab Total Stock Market Index Fund (SWTSX): Schwab’s version of a total US stock index fund. Tracks the Dow Jones US stock market index.
Consider a target date fund
“Another easy way to get started is with a life cycle or target date fund,” Burk said. “Choose a fund that has the projected year you will retire on behalf of the fund. For this investment, you can put all $5,000, as 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 choose a fund with your projected retirement year in the name, such as a 2060 fund. Over time, a fund like this automatically moves your money from riskier stocks to more stable bonds as you get closer to retirement. pension.
This approach makes investing easy for beginners. With a target date fund, you can put your entire $5,000 into a diversified fund tailored to your chosen retirement date.
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This article originally appeared on GOBankingRates.com: I’m a Financial Advisor: I’d Invest My First $5,000 in These 6 Stocks