What’s the best way to invest $1,000? Here’s how to determine what the best answer is for you.
We get questions like this a lot. What’s the best way to invest $1,000? Or $10,000? Or $200? In many ways, the answer is very simple. However, we should probably say that in plural: the answers are very simple.
The problem is that there isn’t just one answer. Is this your first dip into the waters of investing? Do you have a substantial retirement account and want to play with some money to try for some significant returns? Or maybe you want to invest just long enough to pay for that dream vacation in two years?
The ultimate answer of what to do with your money depends on your goals. Even though there are different answers, however, the process of figuring out the best way to invest $1,000 is relatively straightforward.
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The best way to invest $1,000 no matter what your goals are
It’s probably safe to assume that you want to turn your $1,000 into more money. One way to do that would be to plop that entire sum into one investment. However, the stock market can be an unforgiving beast, and it wouldn’t be unheard of for an investment to lose money. It happens all the time – especially with short-term investments.
So even though there are some stocks out there that have a lot of potential for big gains, you probably want to divide your money into a few different baskets. We should note that if you’re interested in stock options, you could put your eggs into one basket, so to speak. However, for this particular post, we’re sticking to more traditional investments. Options can be a great way to make big money in a short period of time, but until you have a good grasp on the way the market works, it’s best to hold off on these.
That leaves us with that word you’ve probably heard over and over: diversification. There are some differing opinions on diversifying a stock portfolio, but there is a sweet spot.
If you have no idea what individual stocks you should buy, you can gain broad exposure to an asset class by purchasing an index fund (a collection of (often) dozens or more stocks that follow the overall market). Unfortunately, this gives you a lot of duds mixed in with some great stocks. In reality, the benefits of diversification are substantially reached when an investor owns around 20 to 30 stocks. Our advice is that, when fully invested, you should hold no fewer than five stocks, but put an upper limit at 12 or 15 stocks. In short, you want a selection of stocks from several different industries to limit your exposure to any type of broad market influence.
7 Rules that will make you a better investor
There’s still a lot of room to move around even within those parameters. But keep a few things in mind:
- Don’t try to avoid risk. It can’t be done. Remember, though, that risk is on a spectrum. Penny stocks and day trading come with high levels of risk. Investing in blue-chip companies and dividend stocks is generally low-risk.
- Don’t buy cheap stocks. You don’t want to mistake cheap stocks for low-priced stocks. Cheap stocks will take your money and run. Low-priced stocks, or value stocks, are worth more than their current share price.
- Be patient. The way you make money in the stock market is by holding stocks, not buying or selling them. Sounds obvious, doesn’t it? You have to be holding on to a stock if you’re going to take advantage of its appreciation.
- Buy famous companies. Big, famous companies’ stocks are generally less volatile than small companies’ stocks.
- Look beyond the famous name. At the same time, just because it is well-known doesn’t mean it’s the best way to invest $1,000. Make sure their profits are increasing.
- Look for dividend stocks. Investing in dividend stocks can be a low-risk, steady way to bring regular income into your portfolio. Dividend stocks aren’t solely dependent on their share price rising or falling. When you buy a dividend stock, you know for sure that you’ll receive a steady stream of income.
- Keep some growth stocks in your portfolio. Growth stocks often outpace the market, and the best ones can earn triple-digit returns in a short amount of time. The caveat to growth investing is that the companies are less mature, have smaller margins, and typically don’t pay a dividend. Thus, the stocks can be very volatile. For many investors, however, the risks of investing in these stocks are worth the potential rewards.
Where does this leave us? What is the best way to invest $1,000? Especially if it’s your first $1,000 in the market? Divide your money into five or six stocks (to start with – you’ll eventually want to get that up a bit). Choose two or three growth stocks, keeping in mind that you want to look for positive earnings. Look to some big, well-known names for another two or three dividend stocks. And be sure to balance these out, so you don’t have all banking stocks or too many tech stocks.
One last bit of advice is to follow us here at Cabot Wealth Network. It’s our job to give you the information you need to make smart investing decisions. There is a lot of free advice on our website and several free reports you can download and read. And when you’re ready, we also offer a wide range of award-winning investment advisories where we share the latest investing information and tips.
What would you say is the best way to invest $1,000? Share your ideas in the comments.