At its core, investing is an incremental game: you build a portfolio a bit by bit rather than all at once. In this article, we’ll look at how you can invest $1000 and get the most bang for your buck.
Dealing with Debt and Building Emergency Funds
Paying off debt is always the best guaranteed return. The interest you save by paying debt down faster is essentially risk free. So the boring answer to “how should I invest $1,000” is always “pay off your debt first.” Even if you are debt free, there is a strong personal finance argument for socking the $1000 away in an emergency fund by way of a higher yield savings account because this will reduce your likelihood of taking on debt in the future.
In real life, however, there are many scenarios where you end up investing while carrying debt. These scenarios are often based on rational decisions, such as taking advantage of employer matching in a retirement account or saving for an inevitable future cost like a child’s education.
Simplicity and Diversity for Cheap
For the vast majority of investors looking to put $1000 to work, the best investment has to be simple, low risk and cheap with respect to fees. If we want a decent return, then the risk must be lowered through diversifying the investment. And the best option for that are low or no fee funds.
Invest $1000 in an ETF or Index Fund
Exchange-traded funds and index funds are an excellent way to invest with a relatively small amount of money. These funds also have the advantage of being very transparent investments. You can learn all you need to know about a particular ETF or index fund in a few paragraphs, including its holdings, any commissions and the expense ratio. You can also pick the best broker for buying ETFs from our list of Best Brokers for ETFs.
Index funds are essentially a passive, broad market investment through the major indices, while ETFs can offer more choice to customize a portfolio. With $1000 you can pile together ETFs with different risk profiles. For example, you could split the money into $250 in a higher risk, growth oriented ETF, $250 into a dividend ETF and put the remaining $500 into a bond ETF. Or you can reverse that mix or even put it all into the growth ETF. It all depends on your time horizon and your risk tolerance.
Invest $1000 in a Target-Date Fund
Target-date funds offer similar diversity to ETFs, but these require less effort than picking your own ETFs. A target-date fund may have a higher expense ratio than your basic ETF, but in return you won’t have to worry as much about allocating your money or rebalancing the portfolio over time. Target-date funds are further down the spectrum of being actively managed and active management costs more in fees.
Invest $1000 With a Roboadvisor
With $1000 to invest, the fees that come with active management can be hard to swallow, especially given that performance often lags passive index or ETF options. That said, robo-advisors like Betterment, Acorns and Asset Builder have hit the market offering active management at lower expense ratios than prices offered by human fund managers. This has prompted traditional advisors like Fidelity and Charles Schwab to jump on the AI bandwagon for some of their offerings. You can get the benefits of active management, particularly more frequent rebalancing of the portfolio during market events, without having to pay the traditional price.
Invest $1000 in Low-Risk Debt Instruments
The funds mentioned above generally carry a higher risk and return profile than investments in debt instruments. If your main goal is preserving $1000 rather than growing it, then debt investments may be your best choice.
Treasury securities, certificates of deposit and savings bonds are not the most exciting ways to invest $1000. They do, however, have the benefit of very low risk and a modest return. There are bond offerings direct from companies that offer much higher interest rates, as well as bond ETFs, but these both require a bit more research and a lot more risk than simply putting the $1000 into a US Treasury Bond. On top of the security, Treasury bond income is exempt from state and local taxes, although it is not exactly a windfall tax savings given the modest rate of return.
Invest $1000 in a Single Stock
Now we are going to look at some investments that you wouldn’t recommend to your grandparents. These require a higher risk tolerance and lot more research, but they also offer high potential returns for your $1000.
This is for the type of person who relishes in yelling “I’m all in!” while playing poker. $1000 is enough to make a single stock purchase through an online brokerage reasonable. You do lose some money in the transaction itself, but the right stock can return many times the transaction costs.
There were several points in the last five years where an investment in Facebook, Apple, Netflix or Google would double or triple your $1000. The catch is that you would have to time the market, and you have to have realized those gains. That said, researching a stock and putting $1000 into it can work out. Of course, it can also end up with you losing money or making a smaller returned than the ETF investments containing the same stock as part of the mix.
Trade Options and Forex With $1000
There is a fairly big gap between can and should when it comes to $1000 investments. $1000 can be used to open an online options or Forex trading account and, yes, these accounts offer ways to leverage that money up to make large returns in a short time. However, just because you can, doesn’t mean you should. Of all the investments we’ve looked at, Forex and/or options trading offers the most risk and the highest probability of being able to lose all your money in a short period of time.
There are, of course, many people who can take $1000 and, pulling on their experience with different trading strategies, produce solid returns while controlling their risks. Some people have probably lucked out and tripled their money on a single currency trade based on a hunch. That said, many of these traders have likely lost $1000 or more just learning their craft though. At least try out these types of trading through simulators before putting your hard earned cash at risk.
The Bottom Line
Although it is not a large sum of money, $1000 is well worth investing. With many of the options we looked at, particularly ETFs, sums as small as $50 or even $20 are worth investing on a regular basis. It bears repeating that investing is an incremental game. You probably won’t go from $1000 to independently wealthy with a single investment. Instead, an investment of $1000 can help you in the direction of financial security and broaden your financial education as a side benefit.