Sometimes one of the hardest parts of investing starts. It can be easy to think and question your potential investments, but once you understand the power of time in investing, you’ll see that it’s the best place to start. If I were to start from scratch with $5,000 to invest, here’s what I would do.
Strive for Diversification
When creating an investment plan, one of the best things you can do is make sure you strive for diversification. Whether it’s diversity across sectors, market caps or growth potential, the phrase “don’t put all your eggs in one basket” holds true. Fortunately, there are exchange-traded funds (ETFs) that can help you achieve this with a single purchase.
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If I were starting from scratch, my first investment priority — and the bulk of my investment — would be an S&P 500 ETF like the Vanguard S&P 500 ETF (NYSEMKT: FLIGHT)† Tracking the 500 largest US companies, the S&P 500 is one of the more popular indexes that investors track, and for good reason. The S&P 500 gives you exposure to large-cap companies in virtually every industry imaginable. From technology to finance to healthcare to consumer goods, it covers it all.
I would also like to access companies with a lower market cap as there is an opportunity for higher growth potential (although it carries more risk). The Vanguard Small Cap ETF (NYSEMKT: VB) and Vanguard Mid Cap ETF (NYSEMKT: VO) both help achieve this and when combined with the Vanguard S&P 500 ETF, they cover companies of all sizes. To round out my investment, I would seek exposure to international equities by investing in an international index fund such as the Vanguard Total International Stock ETF (NASDAQ: VXUS)†
Together I would split the $5,000 like this:
- Vanguard S&P 500: $3,000.
- Vanguard mid cap: $750.
- Vanguard Total International Inventory: $750.
- Vanguard Small Cap: $500.
Use the dollar cost average
Dollar cost averaging involves investing fixed amounts at fixed intervals regardless of the stock’s price at that time. This strategy can take some of the emotion out of investing and help prevent investors from trying to time the market – something that is virtually impossible to do consistently in the long run. The frequency of your investments is not the most important aspect; What matters is that you stay consistent and stick to the plan.
Instead of investing the $5,000 all at once, I’d split it into five weekly investments of $1,000. So, every week, here’s how I would invest the $1,000:
- Vanguard S&P 500: $600.
- Vanguard mid cap: $150.
- Vanguard Total International Inventory: $150.
- Vanguard Small Cap: $100.
Having a plan works wonders
It cannot be emphasized enough how beneficial it is to have a plan when investing. If you’re starting from scratch, your goal shouldn’t be to hit the jackpot with an investment; it should be to build a good foundation in your portfolio. You can achieve this through diversification and a combination of historically more stable investments (such as the S&P 500) and investments with high growth potential (such as lower capitalization stocks).
If you can achieve this, no matter how small the investments, you’ll have put yourself in a good position to build on and thrive in the long run.
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Stefon Walters holds positions in Vanguard Mid-Cap ETF, Vanguard S&P 500 ETF, Vanguard Small-Cap ETF and Vanguard Total International Stock ETF. The Motley Fool has positions in and recommends Vanguard Mid-Cap ETF, Vanguard S&P 500 ETF, Vanguard Small-Cap ETF and Vanguard Total International Stock ETF. The Motley Fool has a disclosure policy.