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How to invest $5,000

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You’ll have a wide range of options if you’re thinking of investing $5,000. Among those are online brokerages, robo-advisors, and traditional financial advisors.

But these options only represent the methods you can use to grow wealth and invest; when it comes to what you should invest in, you’ll also have access to multiple investment types that carry varying fees and risk levels. Experts generally recommend diversifying your portfolio by investing in a variety of securities, but you’ll want to weigh the costs before putting your $5,000 to work.

Before you invest, it’s also smart to make sure you have an appropriate emergency savings fund in place. Investing has its own risks, so you’ll only want to invest what you can afford to potentially lose.

Set up a brokerage account

Online brokerages are investment platforms that offer wealth-building products like self-directed trading accounts, automated investing accounts, and retirement savings accounts.

If you’d like to invest $5,000 without running into large minimum account size requirements, most brokerages let you get started for free. This is typically the case for self-directed, or active, investing accounts. For instance, Merrill Edge, Fidelity, and E*TRADE all offer commission-free trading for investors who trade on their own. And many of these investment apps also let you avoid minimum account size requirements.

Generally, you only run into more fees for mutual fund investments, options contracts, and certain retirement accounts. And some brokerages also offer robo-advice, but you’ll have to pay more for these services.

If you’re a hands-on investor and don’t mind doing the research on each investment you choose, the DIY investing route could be right for you.

Practice passive investing with a robo-advisor

If you don’t want to actively place trades, buy and sell investments, or rebalance your portfolio on your own, a

robo-advisor
could be right for you. Robo-advisors are investment platforms that use algorithms and other technologies to manage your investments.

Not all robo-advisors have minimum account size requirements, but you’ll usually have to pay an annual asset-based fee, monthly subscription fee, or annual flat fee.

For instance, Betterment has asset-based fees ranging from 0.25% to 0.40%. Ellevest, on the other hand, offers three investing plans with monthly subscription fees that range from $1 to $9. Blooom has flat fees that range from $45 to $250 per year.

You don’t have to choose between using a brokerage or robo-advisor, though. You can certainly do both. In fact, you can invest a portion of your money into a robo-advisor and save another portion of it to try your luck at active trading. 

Work with a financial advisor

You can also figure out how to invest your $5,000 by working with a financial advisor or investment firm. But this might be a bit more expensive than investing on your own or with a robo-advisor.

Though not all financial advisors require account minimums, most ask for larger minimum account balances than online brokerages and robo-advisors. Before investing your $5,000, you’ll need to ask advisors whether they require minimum account sizes.

And then there’s advisory fees.

On average, you could pay between $1,000 and $3,000 in fixed fees for ongoing financial advice. Or, if your advisor prefers annual asset-based fees, you may pay between 1% and 2% of your portfolio’s balance per year. In addition, some advisors may charge hourly fees instead of flat fees or asset-based fees. These fees typically range from $100 to $300 per hour.

Stocks: Stocks are available on most exchanges and represent shares, or portions, of ownership within companies. Also known as equities, public companies offer stocks for a number of reasons. According to investor.gov, a company may issue stock to pay off debt, launch new products, expand business operations, or enlarge facilities. You can typically purchase stocks through financial advisors, online brokerages, robo-advisors, and other investment platforms.

ETFs: When you invest in an ETF, you’re placing your money into a fund that invests in a blend of stocks, bonds, commodities, and other investments. ETFs are similar to stocks since both trade on stock exchanges. But these investments are also less risky than stocks since they essentially contain a basket of different securities.

Bonds: Bonds are debt securities that corporations and governments issue out to raise money for certain time-sensitive projects. In other words, your bond investments are like loans. You become the lender, and the government or corporation becomes the borrower. And once the bond has matured, you’ll get back the face value of your initial investment plus interest. 

Mutual funds: Operated and monitored by professional fund managers, mutual funds are companies that pool money from multiple investors to invest in stocks, bonds, and other securities. So when you invest in a mutual fund, you’re purchasing a small share of ownership in that fund, giving you rights to the income it produces.

Options: Stock options are contracts that give you the choice to buy or sell a security at a certain price within a set amount of time. Some investment apps like Firstrade charge you $0 per options contract, but most online brokerages charge between $0.50 and $0.65 per options contract. 

Alternative investments

Real estate: When it comes to real estate investing, you’ll generally have three options: Buy real estate properties on your own, invest through real estate investment funds, or grow your money through real estate crowdfunding investment platforms.

Real estate investment trusts (REITs) could be a great choice if you don’t want to buy and flip properties on your own. REITs are companies that own and manage income-generating real estate assets. And like stocks, you can buy and sell REITs on most exchanges.

Cryptocurrency: Created through heavily encrypted technology, cryptocurrencies are virtual assets that individuals and businesses use to buy goods and invest. Some of the most well-know cryptocurrencies are Bitcoin, Ethereum, Litecoin, and NEO.

Precious metals: You can also invest in gold, silver, platinum, and other metals. Many brokerages and investment platforms offer precious metals investing. And if you’d rather take the retirement savings or cryptocurrency route, you may also be able to set up a precious metals IRA or precious-metal-backed virtual assets (precious-metal-backed cryptocurrencies are virtual assets that are financially supported by physical metals).

Retirement investing accounts

Employer-sponsored plans: Investing and saving for retirement don’t have to be an “either/or” thing. You can do both. If you’re currently employed, you may be able to set up an employer-sponsored retirement plan and contribute up to $19,500 per year or $26,000 if you’re 50 or older (with a maximum contribution cap of $58,000 in 2021 for most plans). The type of plan you’re eligible for depends on your employer. 

IRAs: You can also open an individual retirement account (IRA) and contribute up to $6,000 per year, plus an extra $1,000 if you’re 50 or older. Most online brokerages, investment platforms, banks, and other financial institutions allow you to set up these accounts.

Think about your financial situation from a holistic perspective before investing $5,000. If you’ve got enough in savings and you’re certain that investing this amount won’t detrimentally impact any of your bills or living expenses, now could be a great time to give it a shot.

It’s also important to think about what type of investor you are before you begin. If you’re okay with doing the investment research, executing securities transactions, and handling the intricacies of self-directed investing, a brokerage account could be best for you.

If you prefer hands-off investing or professional guidance, a robo-advisor or financial advisor firm could be a better fit.

Rickie Houston is a wealth-building reporter at Personal Finance Insider who covers investing, brokerage, and wealth-building products.

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