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Sometimes, one of the hardest parts of investing is starting. It can be easy to overthink it and second-guess your potential investments, but once you understand the power that time plays in investing, you’ll see the best thing you can do is start. If I was starting from scratch with $5,000 to invest, here’s what I’d do.
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Aim for diversification
When putting together an investment plan, one of the best things you can do is make sure you aim to achieve diversification. Whether it’s diversity among industries, market caps, or growth potential, the phrase “don’t put all your eggs in one basket” remains true. Thankfully, there are exchange-traded funds (ETFs) that can help you accomplish this with a single purchase.
If I were starting from scratch, my first investing priority — and the bulk of my investment — would be an S&P 500 ETF like the Vanguard S&P 500 ETF (NYSEMKT: VOO). The S&P 500 tracks the 500 largest U.S. companies and is one of the more popular indexes investors follow, and for a good reason. With the S&P 500, you get exposure to large-cap companies spanning virtually any industry you can imagine. From tech to finance to healthcare to consumer goods, it covers it all.
I would also want access to companies with a lower market cap because there’s a chance for higher growth potential (although it comes with more risk). The Vanguard Small-Cap ETF (NYSEMKT: VB) and Vanguard Mid-Cap ETF (NYSEMKT: VO) both help accomplish this and when paired with the Vanguard S&P 500 ETF, they cover companies of all sizes. To finish my investment, I would aim for exposure to international stocks by investing in an international index fund like the Vanguard Total International Stock ETF (NASDAQ: VXUS).
Together, I’d break down the $5,000 like the following:
Vanguard S&P 500: $3,000.
Vanguard Mid-Cap: $750.
Vanguard Total International Stock: $750.
Vanguard Small-Cap: $500.
Utilize dollar-cost averaging
Dollar-cost averaging involves investing set amounts at set intervals, regardless of the stock’s price at the time. This strategy can take some of the emotions out of investing and helps prevent investors from trying to time the market — something that’s virtually impossible to do consistently over the long run. The frequency of your investments isn’t the most important aspect; what matters is that you remain consistent and stick to the plan.
Instead of investing the $5,000 all at once, I would break it down into five $1,000 weekly investments. So, each week, here’s how I’d invest the $1,000:
Vanguard S&P 500: $600.
Vanguard Mid-Cap: $150.
Vanguard Total International Stock: $150.
Vanguard Small-Cap: $100.
Having a plan in place works wonders
It can’t be overstated 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 create a good foundation in your portfolio. You can accomplish this by having diversification and a combination of more historically stable investments (like the S&P 500) and ones with potential for high growth (like lower cap stocks).
If you can accomplish this, regardless of how small the investments may be, you’ve put yourself in a good position to build on to thrive long-term.
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Stefon Walters has 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.
