How to build an investment portfolio for under $5,000
Let's say you have $5,000 to build an investment portfolio. How do you diversify your money?
If you're relatively new to investing, you might find the number of investment options mind boggling. Moreover, it's not easy to know how much money to place in which types of investments.
To help simplify things, let's pretend we have $5,000 to place in a retirement account. The investment mix presented here should be a good guideline for someone looking for growth over the long term. It's not too aggressive, but will allow for a steady increase in retirement savings over the course of many years.
You'll note that there are no individual stocks in this portfolio. Instead, there's a heavy focus on mutual funds and ETFs that can give you exposure to a broad mix of stocks.
Feel free to adjust your mix depending on your age and risk tolerance, and don't forget to re-balance your portfolio once a year so you're staying on track.
$2,000: Total Market Fund or ETF
Every portfolio needs a solid foundation. To get exposure to a wide range of U.S.-based stocks, start by placing a good portion of your money in a mutual fund or exchange-traded fund that seeks to replicate the performance of the entire stock market. I am partial to iShares Total Market ETF [ITOT], and also like Vanguard's Total Market Index ETF [VTI]. Spartan's Total Market Index Fund [FSTMX] is also a good choice. These investments usually have very low expense ratios and can often be traded without a commission, depending on the broker. (Disclaimer: I own all three of the aforementioned in various accounts.)
$1,500: International Equity Index Fund or ETF
To reduce risk, it's important to have some of your money diversified across geographies. Consider putting at least 30% of your money into international equities, which give you exposure to some of the largest companies in Europe, Asia, South America, and even Africa.To get broad exposure to international markets, consider an ETF such as the iShares Total International Stock ETF [IXUS], or Vanguard's Total International Stock Index Fund [VGTSX]. If you want to become more diversified in international stocks and take advantage of growth in emerging markets, consider mixing in iShares Emerging Markets ETF [EEM] or something similar.
$500: Small Cap Stock Fund or ETF
One of the downsides of investing in a total market fund is that you won't get a lot of exposure to smaller companies. Small companies may have more growth potential than other investments, so it's good to have some in your stock portfolio. The Small Cap Value Fund [PRSVX] from T. Rowe Price is a good performer, as is Fidelity Advisor Small Cap Growth Fund [FCPVX].
$250: Mid Cap Stock Fund or ETF
This is another way to ensure your portfolio isn't too geared to larger companies. Mid cap companies are not too big, not too small, but can offer some nice growth. There are many good ways to get involved with mid caps, but take a look at the SPDR S&P 400 Midcap Growth ETF [MDYV], or the Schwab U.S. Midcap ETF [SCHM].
$250: Real Estate
A complete portfolio should have some real estate exposure, and fortunately there are some easy ways to get into that game without going out and buying an apartment building. Real Estate Investment Trusts allow individual investors to access everything from Class A commercial real estate to hospitals and condominiums developments. Look at the Vanguard REIT Fund [VGSIX] to get started.
It's good to invest in some bonds as a hedge against risk, and you may even want to ramp this figure up as you get closer to retirement. Vanguard's Total Bond Market Index Fund [VBMFX] and similar funds will give you exposure to a wide range of corporate and government bonds.
This use of $5,000 should give you a well-diversified and balanced portfolio. As you gain confidence and knowledge, don't be afraid to mix in some other investments, including commodities like oil and gas, or precious metals like gold and platinum. Also consider adjusting your exposure to certain business sectors, such as technology, health care. and financials. But most of all, be patient and keep an eye on your long-term goals.
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