If you fell into a windfall of $10,000 … what would you do with it?
For many Americans who are out of work or burdened with lots of bills, $10,000 would simply be a way to put out some fires and do damage control. These folks would probably need the money for day-to-day use or maybe an overdue expense such as a new roof on the house or car repairs.
Others who have been in lock-down mode on expenses may simply want to take a well-earned break from frugality and splurge on a vacation or new living room furniture.
But if you have the means and the discipline to invest, perhaps the best thing you can do right now is to take that $10,000 and put it to work by investing it. That’s doubly true if you’re behind on your retirement planning — or worse, if you haven’t even started saving yet!
You may think talk about a $10,000 windfall is fantasy, since you don’t get a year-end bonus and have no rich uncles set to die anytime soon. But even if you don’t get the chunk in one fell swoop, the figure is attainable for many. If you can save $200 a week — the amount that many American families spend simply eating out at restaurants — then you can save $10,000 in a year.
It’s not easy, to be sure, but it’s not impossible. And if you’re committed to long-term planning and a secure retirement, you really can’t afford to not to invest on some scale.
For those of you looking for ways to get started, here are five simple ways to invest $10,000 now:
Buy an Indexed Stock Fund
Getting into the stock market can be intimidating, but mutual funds and exchange-traded funds (ETFs) allow you to invest with built-in diversification. And if you pick a low-cost fund that’s pegged to an index like the S&P 500 or the Dow Jones Industrials Average, you don’t have to worry about a money manager making crazy moves or charging you an arm and leg for his investment strategy.
That’s why I recommend beginner investors purchase a major index like the S&P 500 via mutual funds or ETFs. This ensures you’re diversified across a large group of companies and sectors. For instance, the S&P right now is made up of Apple (NASDAQ:AAPL), Exxon Mobil (NYSE:XOM), General Electric (NYSE:GE) and other well-known companies across a wide range of businesses. Why not just buy a little bit of all those companies by buying the entire index?
Index-focused funds also have the advantage of lower costs because there’s no human manager making subjective stock picks. Whatever stocks are in that index are the ones you’ll own a share of. There’s no research, no overhyped marketing — just a static list of stocks picked by the people at Standard & Poor’s.
For instance, one of the cheapest S&P funds out there is the Vanguard S&P 500 ETF (NYSE:VOO) with a measly 0.05% expense ratio. That means you pay just $5 in fees for every $10,000 you’ve invested. Quite a bargain!
Additional tip: If you have $10,000 to invest, you may be able to open an IRA and get tax benefits for this move. If that’s the case, I advise doing so.
Buy a Mix of Stocks and Bonds
A simple equation all investors should know is that 100 minus your age equals the percentage of your portfolio that should be in stocks. For instance a 45-year-old should have 55% of his money in stocks, while an 85-year-old should have just 15% in stocks.
After all, stocks are risky — and as you get older you want to take on less risk.
So, if you have $10,000 and want to keep an eye on your risk exposure, the easiest way to invest it is to put a portion into a stock-focused mutual fund or ETF and then put the balance into bonds.
We’ve already discussed how to easily buy stocks with an indexed fund like S&P ETFs. And thankfully, similar investments allow you to put bonds into your portfolio. So, it’s just a question of figuring out your allocation, buying an index stock fund and plowing the rest into a bond fund.
Not any bonds of course — low-risk, investment-grade corporate and government bonds are the way to go. So-called junk bonds offer a higher rate of return, but that’s because they’re speculative and carry more risk. The purpose of a diversified portfolio is to spread your risk around, so you want to offset the chance of volatility in your stock holdings with a stable position. That means low-risk bonds, even if they may never burn down the house with huge returns.
If you limit yourself to investment-grade bonds, focusing on both corporate and government debt, and avoid funds that use risky strategies like options or swaps to juice returns, you’ll find that the vast bond universe gets narrow fairly quickly.
One such fund that fits these standards is the PIMCO Total Return ETF (NYSE:BOND), which invests only in investment-grade bonds to get low-risk returns under the management of iconic investor Bill Gross. The fund gets five stars from Morningstar, and Gross has a long track record of outperforming his peers.