How and where should you invest your money to maximize return on investment while still mitigating financial risks? Everyone will eventually face this crucial decision when it comes to their personal finances. The best approach to find smart ways to invest your money is to be prepared and strategically analyze all of the investing options available to you. Each investor is different, and your personal finances require a custom strategy that makes sense based on your financial needs in both the short and long terms. But there are some common investing strategies that can help you build a robust and successful portfolio with as little as $1,000 of your money as a starting point.
The highs and lows in the market can fluctuate as much as 20% or more, but the returns for individual investors are often not nearly as dramatic. In fact, it isn't unusual for the earnings of the average investor to be less than market gains by 50% or more. Now, in historic terms a 10% return isn’t bad, but what if you want to do better? Let’s look at some ways to invest money that can give you the opportunity for higher returns, from worst to best.
We’ll suppose you have exactly $1,000 and want to make an investment in the financial markets. Determining where to invest your money is an important and potentially confusing decision. What do you do? Should you invest $1,000 in stocks, futures, options or a combination? How much risk should you take on, knowing that the greater the risk the greater the potential rewards—and potential losses?
So, what’s the best way to invest $1,000 today? With so many ways to invest these days, it can be difficult knowing which is the right course of action for you and your hard-earned money. Here, we'll look at 10 options for ways to invest your money.
1-Pick investments yourself using an online trading platform.
If you're the do-it-yourself type, and you have some investing knowhow, you might want to consider picking investments yourself using an online trading platform such as Scottrade.
In my Scottrade review, I found Scottrade to be both user-friendly and to have exceptional tools for portfolio growth (Note: I've also opened accounts at E-Trade, TD Ameritrade, TradeKing and Motif, but enjoyed the customer service of Scottrade the most).
There are many more discount brokers out there, so you might want to spend a little time researching them and seeing which discount broker is right for you. You can also use this guide in helping you choose the best online broker.
Tip: If you're going to be picking investments yourself using your $1,000, you might want to pick out some exchange-traded funds (ETFs). ETFs are known for their lows costs and diversification benefits.
2-Invest in Penny Stocks
When investigating ways to invest in stocks, some people think penny stocks make sense. $1,000 would seem to go a long way when buying stocks that are priced at less than a dollar. The attraction to penny stocks is that a) since they’re so cheap, there is no place to go but up and b) since the price is so low, you can buy lots of different stocks and you’re sure to find some winners.
Unfortunately, there’s a reason penny stocks are priced so low. They are either obscure, thinly-traded (and near impossible to liquidate) companies or companies that have fallen far down on their luck. And they can still get cheaper—until their value is zero.
3-Buy a Certificate of Deposit (CD)
Maybe it’s unfair to rate this traditionally conservative strategy as a bad investment on our list. But the fact is, at today’s returns, you’re almost guaranteed to lose money. If inflation is 2% and your CD pays at best 1.5%, it isn’t hard to figure out that you’ll be in worse shape when it matures. Plus, you won’t have access to the money in the meantime, so you’ll be out even more in missed opportunity if interest rates go up (which, economists universally agree, they will; the only question is when).
4-Trade Futures
Through the power of leverage, your $1,000 might control a futures contract worth as much as $15,000 or more. However, your broker might require you to have additional cash available for margin calls, and if a trade goes south you could lose your entire stake and more. OTA’s Don Dawson wrote a thoughtful piece in Lessons From the Pros with advice on trading very small futures accounts. It can be done, but until you learn how to invest in futures contracts the risks probably exceed the potential rewards.
5-Trade Forex
Like futures, Forex Trading (also known as FX or foreign currency trading) has a low price of entry; some online brokers will open a “mini” account with a deposit of $100 or less. Forex is also an appealing asset class because it’s relatively simple to understand: most of the action is concentrated in just a few currency pairs. As in futures trading, you can control far more than your actual investment through leverage, but leverage can also magnify your losses.
6-Invest in your kids' college education.
Every parent wants their kids to be successful in life. One path to success is college.
But, there's a problem. Can you guess what it is? College is expensive and is showing no sign of slowing down. Forbes contributor, Mike Patton, points out that college tuition has been increasing by a whopping 5.2% for the last 20 years.
If you want your kids to go to college, and you aren't rolling in the dough right now, you should probably think about saving for their college education.
A 529 college savings plan is a great choice, as it has tax advantages that encourage individuals to save for college. These plans are sponsored by the states, so be sure to check out your state's 529 college savings plan and see if it makes sense for you.
$1,000 is a great start in one of these plans, and depositing the money in such a plan will help you get the technical details of the account worked out so you can continue to contribute. For example, you might be held back by the fear of the unknown. Making a decision to start saving for college today will make it much easier psychologically to invest tomorrow.
Tip: If you're going to contribute to your children's college education, it's wise to start as early as possible. The time horizon for college is usually short: a maximum of 18 years. If you're starting when your children are older, you have even less time. I can't stress enough . . . start as soon as possible. You need all the time in the markets you can get.
7-Invest in ETFs that Track Market Indexes
Warren Buffett advises investors to “stick to low-cost index funds” like the S&P index fund that won his hedge fund bet. You can do the “Oracle of Omaha” one better by buying Exchange Traded Funds (ETFs) that mimic the same measurements. ETFs offer a much wider choice of investments so you can find an ETF that tracks a very narrowly defined sector, if that suits your needs. And since ETFs trade like stocks you can buy and sell throughout the day, unlike mutual funds.
8-Trade Options
Options Trading allows you to control a stock or other asset and capitalize on its price movement without actually owning it. Because options expire in a few months (or even weeks) they’re priced low, far below the per–share price of the underlying asset. Want to trade Tesla or Google or another expensive high-flyer? Options allow you to do that for just a few dollars. A benefit is that unlike futures, the most you can lose is your stake; there’s no threat of an additional margin call. But like futures, options are a complex (though exciting) asset class and you need training and experience to trade options successfully.