How to Invest $1,000

by Adam Benjamin | May 30, 2014 5:01 am

How much money do you need to retire? The answer will be a little bit different for each person, but “more than zero” is a good bet for most people.

But a recent survey suggests that 25% of people have nothing saved for retirement[1]. Not a cent. There are plenty of reasonable excuses for not saving money (using that money to pay off loans, for example), but it might be a simple matter of not knowing how.

One of the best ways to start without feeling overwhelmed is with a small sum and a simple plan.

Even $1,000 — which might not seem like a lot when you’re talking about funding your retirement — can be a worthwhile first step that will eventually produce meaningful results.

Where would you put the money? Where would you even start looking? Let’s take a look at how to invest $1,000 so you can get things started.

Where Should You Put Your Money

One of the biggest pieces of rhetoric in finance concerns “beating the market.” “Fund X posts market-beating returns.” “These three stocks have outpaced the market for years.” You get the picture.

But that’s a lot harder than it seems.

At its core, it’s impossible for everyone to beat the market — the same way it’s impossible for everyone to be an above-average driver. But in the case of stock markets, a stunningly small number of people can pull off the feat — recent studies show that a mere 1% of mutual fund managers[2] beat the market.

Ignore what Gordon Gekko would tell you[3], and just don’t be greedy. If you’re trying to figure out how to invest $1,000, just buy “the market.”

Some of the most popular investments out there are funds that track S&P 500 — the index of 500 big, blue-chip stocks that generally is considered the best proxy for the market. It’s boring, but it works.

The average annual return for the S&P 500 is 8% over the past 40 years[4], so investing in an S&P 500 fund over several decades can really deliver significant returns. Better yet, since you’re in essence buying 500 stocks, and not just one, you don’t have to worry about one single company demolishing your investment.

Sure, you’re not going to convert that $1,000 into $264 billion[5] by the end of the year, but you’re also not going to lose half your money overnight.

How to Invest $1,000 in an S&P 500 Fund

When shopping for S&P 500 funds, you have a couple of options. The main suspects:

• Mutual funds: Buying a mutual fund is like buying a basket of stocks that a professional fund manager (or, in many cases, sophisticated computer programs) to match the performance of an index — like the S&P 500. You can hold these in brokerage accounts, IRAs, and most importantly, 401k accounts.
• Exchange-traded funds (ETFs): These are built much like mutual funds in that they hold several stocks or other assets, but they trade on stock exchanges (NYSE, Nasdaq) just like stocks. Conversely, mutual funds settle up just once a day at the end of the day. However, very few 401k accounts allow you to hold ETFs.

If you have a 401k, you’re almost certainly looking at mutual funds — most 401ks don’t hold ETFs. Most employee-sponsored plans have some sort of S&P 500 fund, like the Vanguard 500 Index Fund (VFINX[6]).

If you’re investing $1,000 out of your pocket, though, you’re likely talking about using a brokerage account or an IRA (find out more here[7] and here[8]) both of which allow you a lot more freedom than a traditional workplace retirement plan.

If so, you should consider ETFs, which have a couple of perks. For one, they tend to be cheaper than their mutual fund counterparts. And unlike mutual funds — which almost always require a sizable minimum investment (be it $1,000, $5,000 or even more) — you only need to be able to afford one share of an ETF to invest.

A quick rundown of the most popular ETFs that track the S&P 500 Index:

• SPDR S&P 500 ETF (SPY[9])
• iShares Core S&P 500 ETF (IVV[10])
• Vanguard S&P 500 ETF (VOO[11]).

While they have tiny differences, they all have the same goal: to track the performance of the S&P 500.

One thing that’s different about these funds is their “expense ratio,” or the cost of owning the fund. For instance, if you look at the “Fund Information” section for the SPY ETF, you see a net expense ratio of 0.0945%. That means for every $1,000 you invest in the SPY, you pay 94.5 cents in fees. It doesn’t sound like much, but even a few cents of difference in fees can add up thanks to the power of compounding returns.

For the record, the SPY’s expense ratio of 0.0945% is higher than the IVV’s 0.07%[12] and nearly double the VOO’s 0.05%[13].

Otherwise, you’ll just want to keep a few other things in mind:

• If you buy an ETF whose shares trade for $95 per share, you won’t be able to invest an even $1,000 — but it’s better to invest most of $1,000 than nothing at all!
• Also, in addition to those ETF fees, you’ll also likely have to pay a few bucks in trading fees when you buy shares for the first time. (Similarly, you have to pay fees when you sell.)

Bottom Line

No one should pretend that investing $1,000 into an index fund will provide for your entire retirement — the math doesn’t just work.

The importance of investing such a small amount is to get used to the basics, and also to clear that mental first step of giving up some of your money now so you have it (and more) later.

Start putting your money work today. The first step is the most important.

Adam Benjamin is an Assistant Editor at InvestorPlace. As of this writing, he did not hold a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2014/05/how-to-invest-1000/

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