What's the best way for a 20 year old to invest $5,000?
I would like to invest $5,000. If invested, I would plan not to touch that money until age 35. I want to put the money away and sort of "forget" about it while I go through the next 15 years of my life. I would like to have all profits reinvested during that time. I am considering the S&P 500. Is this my best option?
This is a great question! The best place to put your money depends on a lot of different factors. If you have any debts that have interest rates in excess of 10%, you should highly consider paying them off. This is the easiest way for you to earn a guaranteed rate of return. If you are debt free, you may want to start investing in a retirement account. If you are employed and your employer is offering you a match, then you should contribute at least enough to get your full match. If they do not offer a match, then you may want to fund an IRA. However, if you are planning on needing the money at age 35, then a retirement account would not be a great option due to penalties and taxes. A brokerage account is always an option if you are needing access. As you can see, we really need more information about your situation to know what is best. Generally, I would say a diversified portfolio of stock-based ETFs would be a great start to put your money to work. I hope this helps! If you still have questions about your situation, talk to a fee-only financial planner.
You are absolutely correct in considering a well established, highly diversified equity investment as a great way of investing for fifteen years and have it on auto pilot. The strategy is low cost if you choose a very low cost index fund and have all dividends reinvested.
What you should focus on is how broad an index you want to choose. Generally, the broader the better since you want to set it and forget for fifteen years. The S&P 500 is focused on U.S. registered large, publicly traded companies. It represents about 70% of the U.S. public equity market and the U.S. market represents a little over half of the world equity markets. So, if you really want to be as broadly diversified as possible, you may choose a global equity index fund. A well established global equity index is the MSCI All Country World Index, abbreviated as ACWI. Investing globally means you will be exposed to a wider array of markets and will have exposure to foreign currencies. That may sound risky, but over time, currencies fluctuate in relationship with each other and generally adjust.
An "in between" level of diversification is to stay in the U.S. market, but expand beyond just the largest companies to include small and medium sized companies in the remaining 30% of the U.S. market. A well established index for the entire U.S. market is the Russell 3000.
If you just look at recent past performance, the S&P 500 index will have outperformed the more diversified solutions discussed above. That will not always be the case and certainly it is likely that over a fifteen year period, smaller companies will outgrow larger ones and the U.S. will not always be the top performing market.
15 years is long enough to invest in stocks, but, it's not long enough to just invest in one area of the stock market. I would look more at a more diversified mix of stocks.
You also shouldn't be 'forgetting' a stock investment. Since you have a defined end date, you will want to move from stocks to bonds over the 15 years. You likely should not have everything in stocks if this is the end goal, your risks of having less are greater, but, then again, it's not a lot, and if you want to take your chances on what the markets do, then perhaps your 35-year-old self would be alright with an investment that could crash.