MARK RIEPE: I’m Mark Riepe, and this is Financial Decoder, an original podcast from Charles Schwab. Today we have a special bonus episode about a question I get all the time. People ask me, “I’ve got some money. How do I invest it?”
The answer depends, in part, on how large the amount of money is, but for today’s purposes we’ll focus on $1,000.
Maybe you’ve got a special bonus from work, or a small gift, or even a small inheritance. Maybe you’ve never invested before, and you think now is the time to start.
Or maybe you’ve already got a small portfolio, and you’re wondering what the smart thing is to do with this unexpected bit of good fortune.
Regardless of the context, our advice is to first identify your short-term and long-term goals. Why are you investing? Are you trying to save for a car, a down payment on a house, or retirement? How soon do you hope to reach that goal?
Once you’ve nailed down your goals, it’s time to select the type of account you’re going to use. Choosing an account type might seem simple, but it’s also important. Many account types have specific rules and requirements for how and when the money is taxed and can be withdrawn.
Some of the more common account types are designed to help people who are investing for retirement, like the individual retirement account—or IRA. Another popular long-term goal is paying for education. The 529 account is designed for that.
Investing for a shorter-term goal—say, a trip that’s going to cost $2,000—is probably best done in a brokerage account. If the trip is coming up soon, you’ll want to invest the money conservatively. You don’t want to take on much, if any, risk that the investment will decline in value.
Of course, brokerage accounts allow you to invest in many things, everything from stocks and bonds to mutual funds, exchange-traded funds (or ETFs), and more.
If you’re using this $1,000 to get started with investing, you might think this is a chance to pick up stock in a company you like. But it’s important to understand that investing in individual stocks requires time, expertise, and a certain level of risk tolerance.
To see whether investing in the stock of a company makes sense, always keep in mind that investing is an act of optimism. The fate of your investment is tied to the future performance of your company.
Because of that, you’re going to want to develop a well-informed opinion of its future prospects.
By future prospects, we mean looking at information like how fast the company is growing—and what its continued growth potential looks like—how much revenue it takes in, how much of that is profit, and of course, the price that you’re paying now for that future growth, as well as the assets that the company currently owns.
And then all of these factors need to be examined in comparison to the company’s competitors.
Finally, you also need to make sure the riskiness of the company fits with your comfort level and goals.
As we mentioned before, if you plan on needing to spend your $1,000 within the next few years, investing in any single company is a risky endeavor, given how much the prices of individual stocks fluctuate.
Because of this, individual stock investments make the most sense for situations where you don’t plan on needing the money for several years.
If becoming a stock picker isn’t for you, it may still make sense for you to invest in the stock market.
But you’ll want to consider options that can help you spread your money across many different types of stocks so that the fate of your portfolio doesn’t hinge on the performance of a single company.
For example, equity mutual funds and exchange-traded funds (or ETFs) are made up of many different stocks, and they come in many varieties.
They can give you broad access to the whole stock market or focus on particular sectors, like technology or energy.
Of course, going the all stock route—even if you’re investing in many, many types of stocks—still requires you to have a strong stomach and a long time horizon.
If you’re like most people, you may prefer a balance where you have some aggressive investments, like stocks, but also some conservative investments, like bonds and cash.
One way of achieving this with a set amount of money, like your $1000, is to use literally what’s referred to as a balanced mutual fund. Balanced funds hold a mix of asset classes—that is, stocks, bonds, and other investments.
Of course you could also buy a mix of diversified funds that each focus on a particular asset class.
There is however, another, newer way to avoid the risk of investing in a single company, and that is to buy fractional shares, or small slices, of multiple companies.
Many popular stocks are expensive. Your $1,000 might not even buy a single share. But if you buy just a portion of several individual stocks, you could assemble an entire portfolio.
Keep in mind, however, that now you’re back to researching individual stocks. And ideally, for the long term, you’d still want a diverse mix of investment types.
For more information about investing in fractional shares, see schwab.com/StockSlices. That’s Schwab.com/StockSlices.
Regardless of how you choose to invest—fractional shares, funds, or individual stocks—it’s important to stay the course. Even small contributions, made regularly, are likely to add up over time.
Whether you’re a new investor or just thinking about where to put that next $1000, it’s nice to know the options you have to build that diversified portfolio. To discuss your own investing goals and get more advice, you can call Schwab at any time at 877-279-4476.
Thanks for listening. We’ll be back with more of our regular episodes soon.
For important disclosures, see the show notes or schwab.com/FinancialDecoder.