Smart Ways To Invest $5K

There are many options for investing $5,000, and the best choice depends on your risk tolerance, goals, and timeline. If you are investing for retirement, a Roth IRA or 401(k) could be a good option. If you are investing for the shorter term, a high-yield savings account or short-term CD might be more suitable.

For those with a higher risk tolerance, investing in stocks, peer-to-peer lending, or real estate could offer higher returns. Diversifying your investments across different stocks and ETFs can also help preserve and potentially increase your purchasing power.

Robo-advisors are another option for those who want a more hands-off approach, and fractional shares can help you invest in a wider range of stocks or ETFs.

Invest in fractional shares

Fractional shares are portions of a stock that are less than one whole share. Investors can purchase or own a fraction of a share without buying the whole share, allowing them to diversify their portfolio with smaller investments in expensive stocks. For example, if you buy half a share of a company, you would be purchasing a fractional share and would be entitled to a proportional amount of the gains of holding a full share, as well as a proportional amount of any dividends paid by the company.

Fractional shares are beneficial for investors who want to put all their money to work at once. For instance, if you deposit $1,000 into your brokerage account and want to split it evenly among shares of four different companies, you would only be able to buy one share of each company if your brokerage account did not allow fractional share investing. With fractional shares, you could put all $1,000 of your money to work and have equal-sized positions in all four companies.

Fractional shares also allow investors with relatively small amounts of investable cash to buy whatever stock they want. For example, if a company's stock trades for about $1,300 per share, you would not be able to afford to buy any shares if your broker did not allow fractional shares. However, if they do allow fractional share investing, you could add this company's shares to your portfolio for as little as a few dollars.

Fractional shares do have some drawbacks. You generally don't get voting rights with fractional shares, and some brokers restrict when you can sell them. Additionally, you may encounter small fees for fractional shares.

If you're looking to invest $5,000, fractional shares can be a great option to consider. By investing in fractional shares, you can diversify your portfolio and include stocks that may have previously been out of your price range. This can help you maximize your returns and make the most of your $5,000 investment.

Build a micro real estate portfolio

Real estate is one of the more popular investment options, but many people assume that only the wealthy can afford to invest in it. However, you can start investing in real estate with as little as $5,000. Here are some ways to build a micro real estate portfolio:

Real Estate Investment Trusts (REITs)

REITs are similar to stocks, and you can purchase shares in real estate and diversify your portfolio by investing in theatres, malls, mortgage debt, and more. REITs are also appealing because they offer higher dividend yields compared to stocks, access to a variety of residential and commercial real estate asset classes, and higher liquidity. However, they also come with high risk and fees and are best as a long-term investment.

Real Estate Debt

Investing in real estate debt involves buying mortgages, notes, or bonds secured by real estate assets or investing in a real estate debt fund. This option allows investors to earn returns without managing rental properties. It offers high returns, low volatility due to its low correlation with equity markets, and diversification benefits by spreading investments across multiple loans. However, there is a risk of losing money if borrowers default on their loans.

House Hacking

House hacking involves generating revenue from your home, such as renting out a spare bedroom, to pay off your mortgage faster or buy another rental property. This strategy is helpful for novice investors to learn the ropes of the real estate business as passive investors or active landlords. When house hacking, it is important to invest in a reasonably priced home and consider factors such as property taxes, job growth rate, and neighbourhood atmosphere.

Real Estate Partnerships

By partnering with other investors, you can pool your $5,000 with their resources to buy an investment property. For example, you could partner with a contractor willing to fix up a property in exchange for a share of the profits. Real estate partnerships allow investors to leverage the strengths of each partner, develop a solid network of connections, and build a solid real estate portfolio over time. However, there is a potential for conflict if partners disagree or have difficulty defining and assigning responsibilities.

Lease with Option to Buy

Leasing a property with an option to buy allows investors to buy property relatively cheaply. You rent a property from the owner with the intention, but not the obligation, to eventually buy it. The landlord allocates a portion of your rent towards the purchase, and you may be able to lock in the price before buying. However, there is a potential to lose money if you agree to a purchase price and the market declines.

Open a Roth IRA

A Roth IRA is a powerful way to save for retirement. It is an individual retirement account (IRA) that you fund with after-tax dollars. While there are no current-year tax benefits, your contributions and earnings can grow tax-free, and you can withdraw them tax-free and penalty-free after age 59 1/2 and once the account has been open for five years.

A Roth IRA offers flexible access to your money. You can withdraw any amount you add to your Roth without taxes or penalties at any time for any reason. This feature makes the Roth IRA a liquid investment option.

A Roth IRA can be a good savings option for those who expect to be in a higher tax bracket in the future, making tax-free withdrawals even more advantageous. If you believe your tax rates will be higher in retirement than they are now, a Roth IRA may be a better choice than a traditional IRA.

There are no contribution age restrictions with a Roth IRA. You can contribute at any age as long as you have a qualifying earned income. This makes it a suitable option for those who want to continue working past the traditional retirement age or have earned income during their retirement years.

The earnings in a Roth IRA grow tax-free. Contributions and potential investment gains accumulate tax-free, maximizing your retirement savings. This feature can help you make the most of your $5000 investment over the long term.

There are no mandatory withdrawals with a Roth IRA, unlike a traditional IRA. You are not required to take minimum distributions, allowing you to leave your money in the account to continue growing tax-free. This flexibility can be beneficial if you want to pass on your retirement savings to your heirs.

If you pass away, your heirs can inherit your Roth IRA without incurring additional income taxes. Withdrawals of contributions by your beneficiaries are tax-free, and earnings are generally tax-free if the Roth account has been open for at least five years. This feature can help maximize the value of your estate.

Use a robo-advisor

Robo-advisors are a great option for those who want to automate their investments. They are investment platforms that use algorithms to build and manage an investment portfolio for you, based on your goals and risk tolerance.

Robo-advisors are a low-cost alternative to traditional financial managers, with most charging less than 0.50% of assets under management. They are also more accessible, with some robo-advisors having no minimum investment amount and others requiring as little as $500.

• Wealthfront: This robo-advisor offers a wide range of features, including fee-free stock investing, low-interest-rate borrowing, and daily tax-loss harvesting. It has a $500 minimum investment amount and a 0.25% management fee.
• Betterment: Betterment is great for beginners, offering multiple portfolio options and an easy-to-use platform. It has no account minimum and charges a 0.25% annual fee for accounts with at least $20,000.
• SoFi Automated Investing: SoFi offers free investment management and access to financial advisors with no minimum investment amount.
• Ellevest: This robo-advisor is designed specifically for women, offering tailored investment portfolios that take into account women's career and life situations. It has a $12 monthly subscription fee and a $1,000,000 minimum for private wealth management.
• Vanguard Digital Advisor: Vanguard offers affordable robo-advisory services, using their own ETFs to create a personalized retirement plan. It has a low annual fee of around 0.20% and a $3,000 minimum investment amount.

Robo-advisors are a great option for those who want a hands-off approach to investing and are willing to pay a small fee for portfolio management and additional features.

Diversify by investing in ETFs

Exchange-traded funds (ETFs) are a great way to diversify your portfolio. They are baskets of individual securities, similar to mutual funds, but with two key differences. Firstly, ETFs are traded on exchanges like stocks, while mutual fund transactions only occur at the end of the trading day. Secondly, ETFs have lower expense ratios.

ETFs are a good option for those looking to invest $5,000. They are relatively inexpensive and offer higher liquidity and transparency. Most ETFs are passively managed funds that mimic an index or other benchmark, so their performance matches that of the benchmark as closely as possible. This means that the money you invest is distributed across the companies in the index.

• IShares Core Moderate Allocation ETF (AOM): This ETF holds a total of seven other iShares ETFs, providing exposure to U.S. bonds, U.S. stocks, international developed stocks, international bonds, emerging market stocks, U.S. mid-cap stocks, and U.S. small-cap stocks. It currently has a 40% equity and 60% bond split with a 0.15% expense ratio.
• Vanguard Total World Bond ETF (BNDW): This ETF provides exposure to over 17,900 government and investment-grade corporate-issued bonds. It has a 6.7-year average duration and a 4.8% yield to maturity. The expense ratio is 0.05%.
• SPDR Gold MiniShares Trust (GLDM): Gold has a "flight to safety" tendency, making it a good addition to a diversified portfolio. GLDM has a 0.1% expense ratio.
• IShares Global Energy ETF (IXC): Shares of energy companies have historically been a reliable inflation hedge. For a 0.44% expense ratio, you get access to all five of the "super-major" integrated energy companies. IXC also pays a competitive 3.2% 30-day SEC yield on a semi-annual basis.
• Invesco S&P 100 Equal Weight ETF (EQWL): This ETF takes all the large-cap stocks found in the S&P 100 index and weights each equally at 1% during quarterly rebalances. It has a 0.25% expense ratio.
• SPDR Dow Jones REIT ETF (RWR): This ETF holds 103 domestic real estate investment trusts (REITs) and has a 0.25% expense ratio. It pays a 4.1% 30-day SEC yield.

Frequently asked questions