What Is the Most Financially Profitable Way of Investing $5,000?

March 3, 2004 6:19 PM

What is the best thing to do with a small amount of money, around $5,000? Savings interest is almost a joke, CDs look attractive or maybe even mutual funds. Preferably the safer the better, as in investing it all in a high-risk mutual fund and losing it would make me cry. I've checked out "Investment FAQ" and it seems as if CDs are the best. I know little about investing but making money doing nothing intrigues me. What would be an expected return on such an investment? Is it even worth locking the money up for something like $10 a month?

This is just out of curiosity really. If I was really serious about this I'd be talking to a paid professional. I was just seeing if $5,000 was really enough to invest in or was it more of a "ha ha ha, investing is only for RICH people". All advice given will be seen as for educational purposes only.

posted by geoff. to Work & Money (19 answers total)

$2000 on the hard eight.
posted by the fire you left me at 6:36 PM on March 3, 2004

If you have debt, paying off (some of) that debt is often your best ``investment.''

There's not much use having $5000 earning you $10/month or whatever if you also have $5000 in debt costing you $50/month.
posted by ROU_Xenophobe at 6:44 PM on March 3, 2004

Seconding ROU_Xenophobe's advice. Given that rates on savings are so low right now, put the $5K on any debts you have, paying off the higher-interest ones first.
posted by mr_crash_davis at 6:51 PM on March 3, 2004

I think it matters when you need it (if you can let it be tied up for a while) and whether you can afford to lose it.

If you can tax-free it through a retirement plan or something that might be the way to go.
posted by callmejay at 7:06 PM on March 3, 2004

SoundMoney always has good suggestions for getting started, and you can listen online.
posted by anathema at 7:09 PM on March 3, 2004

Yep, pay off your car and credit cards, which carry higher interest rates than you'd get on the market. If you are debt free, consider investing in a low-to-medium-risk mutual fund, like a bond fund or midcap value. It would help to know, before getting too specific, how long you plan to keep the money invested and how much risk you are willing to accept.
posted by PrinceValium at 7:19 PM on March 3, 2004

Response by poster: For the sake of argument let us assume debt free.

I would say put the money at like 3 years. I mean if it's earning a good amount of extra income, nothing ridiculous, it would seem prudent to pretend the money just isn't even there. But I guess that would be something like a CD that would pay interest quarterly or whatever. It would seem like going through a mutual fund and getting $1000 on the $5000 (20% probably is high), at the end of 5 years seems low, as I was looking at definitely around 5 years max.

I was just passing by a bank and saw an advertisement for CD and was kind of doing math in my head and all the returns seemed too low for anything under a $50,000-$100,000 investment. Not to sound like $1,000 (a number pulled out of my ass) every 5 years isn't bad, but at ~$16.77 a month looks futile. So then I went searching on the internet to see if small time investing was feasible and what was involved and came across a lot of information but nothing much anecdotal or even hard numbers. Just general concepts.
posted by geoff. at 7:39 PM on March 3, 2004

There's no low risk way to get a good return on your 5k.

A couple of thoughts, though - the stock market performs historically at 10-11%, so over time, 5k would do all right.

Also, real estate, which most people invest in through heavy leverage, could turn 5k into a lot of money. This has worked out for me, although a lot of it has to do with being in the right place at the right time.

In the short term (3 years), I would say that you can get a decent return on 5k, but you have to be smart, willing to incur risk, and do a lot of homework. There are a lot of stocks, for example, that have doubled and tripled in the last year. If you did some research and knew when to sell (now!) then you could have turned your 5k into 15k, easily. Of course it could have easily gone the other way. And now's not the time to get into those stocks, but I'm sure there are bargains out there. You just have to do your research.
posted by drobot at 8:04 PM on March 3, 2004

Response by poster: Thanks that was just what I was looking for. I'll start looking into it and real estate, living in the same area for all my life there have been times where I've said "Oh that place would be cool to live", and sure enough 5 years later it goes from looks cool, to artists, to yuppies. I just didn't know you could use 5k on real estate.

I thought about doing individual stocks but it just seems really high risk.
posted by geoff. at 8:16 PM on March 3, 2004

Take aim at the highest interest rate you can. That might be your tax rate. Put the money in a retirement fund, get back the taxes you owe on it immediately, and watch it grow from there.
posted by scarabic at 8:26 PM on March 3, 2004

An easy way to diversify an investment in real estate is the Dow Jones US Real Estate Index Fund, offered by iShares as IYR. It can be traded at many brokers like a stock. shagoth might be along with more information later, as he's the one who pointed me to it. It's really been on a tear, returning 46% over the last year.

Of course, my investment advice is worth exactly what you paid for it. There's no guarantee that the real estate sector will continue to be strong, although it certainly has been recently.
posted by kindall at 8:40 PM on March 3, 2004

Three years is a relatively short time horizon. I'd look at bonds or, more realistically, mutual funds that invest in bonds. Please don't invest in real estate or stocks unless you're in it for the long haul.
posted by electro at 10:51 PM on March 3, 2004

Geoff, right now interest rates suck it's very hard to make money. But bide your time eventually interest rates will rise they always do and you could earn %10 or more a year on that $5000. Utill then hide it under the mattress (CDs are good) and when money becomes scarce you'll be sitting on a pile of it while everyone else in bonds and stocks get killed wishing they had cash.
posted by stbalbach at 11:35 PM on March 3, 2004

don't give it to citibank, whatever you do. i've been trying to get money out of my account with them for nearly a month now. it seems they've decided i'm a money launderer. seriously. i'm spending a lot of money on international phonecalls trying to get someone to unlock the account...
posted by andrew cooke at 4:53 AM on March 4, 2004

Preferably the safer the better, as in investing it all in a high-risk mutual fund and losing it would make me cry.

The ironclad rule of investing is that high returns always accompany high risk. Low returns accompany low risk. CDs and U.S. Treasury Notes are among the safest investments, but they will give you relatively low returns (especially with interest rates being so low these days). Also, you must understand that with a CD, your money is locked up for a period of time, and if you want it back you have to pay a penalty. The same is not true with treasury notes or mutual funds.

The next thing to look at is a money market fund. These are technically mutual funds, but they invest in short-term obligations that are traditionally seen as quite safe. These days, though, they barely give you a return above inflation.

A slightly more risky investment (but still quite safe) is a short-term corporate bond fund. The Vanguard Short-term Corporate Fund Investor Shares is one to look at. Its symbol is VFSTX.

Note that with all of these investments, except CDs, no rate of return is guaranteed. I can't confidently tell you that with any of them you will beat $10 per month. But, they all tend to be fairly predictable, and have beat that historically.

I'll also repeat what others said above: The smartest investment is usually paying off debt early. If you have a student loan, a car loan, or God forbid a credit card running balance, think of paying it off early as an investment that is guaranteed to "earn" you 7-15% a year in foregone interest payments, all tax free.

Since I've got you interested in investing, let me tell you something else you should be thinking about: Retirement funds. Look into opening a Roth IRA, and investing in a mixture of stock and bond funds to prepare for your retirement. This may actually be the best use for some of that $5000.
posted by profwhat at 4:55 AM on March 4, 2004

1. Pay off debt.
2. Max out your Roth IRA contribution for the year (think tax free growth.)
3. Index fund - your pick. Vanguard, for example, is an excellent company with a wide menu of index fund options, in addition to having very low management fees.
4. ???
5. Profit!
posted by jazzkat11 at 7:41 AM on March 4, 2004

What electro said. Three years is too short a time horizon to edge out into things like stocks.

You might want to consider investments that are like money market funds offered by large corporations. I'm in GMAC's DemandNotes (which is closed to new accounts, unfortunately), and it's paying 2.5%. That's what you'd get from a bank only by locking your money into a CD, but I can add, withdraw and even write checks against it. Plus, when interest rates go up -- as they will do -- so will your rates. While the GMAC option is out for now, Ford, GE and others offer similar programs. None of these are insured, but they seem awfully safe to me, and likely much better than what your bank is offering.

If you'd rather stick with a bank, try BankRate to find one that pays better.
posted by pmurray63 at 12:28 PM on March 4, 2004

On the other hand, three years is a good amount of time to be in a balanced fund. I've always liked Vanguard Wellington myself. It has a 60/40 stock-bond split, with the stocks conservative value. The stated objective of the fund is capital preservation, so expect more dividends and less of a fluctuation in share price than, say, the S&P 500.

The other option for low risk and high(er) return is to go with a type of bond know as a Ginnie Mae, which are mortgage-backed securities guaranteed by the federal government. Vanguard GNMA is a good choice in that regard.

If you can refinance student loans, do it. I actually am stretching out paying off the student loans because my interest rate is so low (2.875%). It makes more sense to invest the money otherwise spent in paying the loan in one fell swoop and paying it off slowly, and better on the credit rating too (student loan debt is generally "good" debt).
posted by calwatch at 2:06 AM on March 6, 2004

Yep, I'm in Vanguard Wellington also, and I'll second calwatch on that. (For awhile there it was actually doing better than the S&P500 over a multi-year period, when that index was sucking well water.) However, there's still a small chance that three years on, you could have lost money. It's low with Wellington, though; its worst year of the past seven -- and the only down year of those -- was -6.9% in 2002. It's cheap, too (0.36% expense ratio).

It all depends how sure you need to be when you hit that three-year mark.

Ginnie Mae, which are mortgage-backed securities guaranteed by the federal government

Technically they're not, calwatch -- read the fine print. But most people believe that the Feds would step in if things got ugly.
posted by pmurray63 at 8:35 PM on March 7, 2004