How To Invest $5000 in Australia – Best Way in 2020

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The Best Way to Invest in 2020

The best thing an investor can do right now is to ignore all the market predictions being released for 2020. Every research department has to put out a prediction, and most of them are not worth the paper they are written on. So what does one do? Invest in dividend stocks. It is an important but preciously little known fact that the lowly dividend has historically accounted for 45% of all stock market returns. They are also tangible and predictable in a way stock prices are not, giving them a crucial place in a portfolio.

FINSUM: An additional stimulus for dividend stocks is that the aging population is hungry for them since bond yields are so anemic. Check out AT&T at 5.3%.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The best ways to invest $5,000

“If you’re asking what’s the best way to invest $5,000, it’s kind of like asking what should I have for dinner tonight? Well, it depends,” says Greg McBride, chief financial analyst of Bankrate. “What do you like? What don’t you like? Do you have any allergies? What are you in the mood for? The same thing [applies] here.”

Before you get to specifics, such as how much risk you can stomach or what to choose off the menu of investments, start with the basics.

“The first question you need to ask yourself is, ‘When do I need to spend that money?'” says Manisha Thakor, founder and CEO of MoneyZen Wealth Management. “My rule of thumb is investing is something you do for the long run, which I would define as a minimum of five years and ideally 10-plus years. Once you are sure it’s long-term money, now you’re ready to really get into the nuts and bolts.”

To help you delve into those nuts and bolts, we asked financial experts for advice on the best way to invest your $5,000. They suggested options for both the short and long term, if you’re hoping to grow that money for retirement decades down the road.

Short term

Online savings account. The best place for money you need in a moment’s notice is an online savings account, McBride says. Even though interest rates for online savings accounts are low – hovering around 1 percent – they “pay the best returns relative to the savings account offers among all the financial institutions,” he says. The returns currently compare to those of CDs, but without the early withdrawal penalties.

CDs and money market accounts. If your time horizon is less than five years, Thakor recommends putting the money in a CD with a maturity date that matches your goal. This option may be ideal if you have a low risk tolerance, since CDs are insured by the Federal Deposit Insurance Corp. up to $250,000 per depositor. The downside? You can’t touch those dollars for a predetermined time without paying a penalty.

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Alternatively, money market accounts, which are also insured by the FDIC, earn slightly less interest than CDs, but you can withdraw the money at any point. Just keep in mind that interest rates are generally inversely correlated with access to your money. As Thakor puts it: “If you want unlimited access to your money, you’ll get slightly lower rates. If you don’t mind tying it up for a defined period of time, which is what you do with a CD, then you can get a slightly higher rate.”

Given their low yields, CDs and money market accounts are better for shorter-term investments, since they don’t always keep up with the cost of inflation. “Even though on paper it might look like you’re protecting your principal and [your] deposit is growing a little bit in value, you’re actually losing ground because the purchasing power is not holding,” says Paul Granucci, a financial solutions advisor with Merrill Edge.

Long term

Actively managed mutual funds. Investors with a longer time horizon can afford to take on more risk for a greater return by putting their money in the stock market. Mutual funds offer an easy way for investors to gain exposure to a broad range of stocks. If picking stocks makes you nervous, fear not. With actively managed funds, a fund manager makes all the decisions for you, including what sectors of the economy to invest in and which companies are undervalued or poised for growth. But beware: Mutual funds come with fees. The average actively managed stock fund charges an annual fee of 1.26 percent, according to fund tracker Morningstar, and Thakor advises against buying mutual funds with an expense ratio of more than 1 percent.

If you do go the actively managed route, Granucci recommends a globally balanced mutual fund, which is diversified in stocks, bonds and cash and contains domestic and international investments.

Index funds. “If the goal is to try to achieve a lot of diversification and build a portfolio that you can more or less kind of set and forget, it’s hard to beat index funds,” says Christine Benz, director of personal finance for Morningstar.

With index funds, you don’t have the opportunity to beat the market, but you can keep up with the market, “which is not a bad place to be given that most active fund managers do not outperform their benchmarks over long periods of time,” Benz adds.

Thakor points out that index funds are the healthiest option on the menu – without organic food prices. “Index funds are the financial equivalent of a superfood like chia seeds or kale,” she says. “Depending on what type you pick … you can get exposure to literally thousands of stock and bond issues at a very nominal fee.” The average expense ratio for stock index funds is 0.75 percent, according to Morningstar.

ETFs. Mutual funds and ETFs are very similar. “When you buy one share of an ETF or one share of a mutual fund, you’re buying a small piece of a lot of different investments that make up that fund,” Granucci explains. “The difference is how they are managed.”

There’s no active management with ETFs, so if you’re thinking about investing in a handful, be prepared to rebalance your portfolio at least once a year (mutual fund portfolios should be rebalanced, too). Advantages include costs that are a lot lower than those of mutual funds (Morningstar reports ETFs have an average annual fee of 0.57 percent) and no minimum investment requirements. While mutual funds may demand initial investments of $1,000 or $3,000, ETFs – which are traded on exchanges and fluctuate in price during the day – cost only their current trading price, like stocks.

ETFs offer exposure to asset classes ranging from bonds to domestic and international stocks, and even alternative investments like commodities. “Instead of trying to do one fund that’s going to do it all, you might need to find three or four ETFs that are going to fill all the different buckets that you want to hit,” Granucci says.

Before diving in. You might be ready to put that $5,000 to work, but before you settle on one of the above investments, McBride points out three places where your money would be better spent:

  1. Paying down high-interest debt.
  2. Saving for retirement in a tax-advantaged account, such as a 401(k) or individual retirement account.
  3. Starting an emergency savings fund that covers six months of living expenses.

“For the vast majority of Americans, tackling those three priorities is going to more than chew up that $5,000,” he says.

And there’s a reason why paying debt is at the top of the list: You’ll get a higher risk-free rate of return by paying down credit card debt than you will investing in financial securities. As McBride says, “Paying off a 15 percent credit card balance is like earning 15 percent risk-free.”

But let’s assume you’ve paid off your debt, contribute to a 401(k) or IRA and have enough savings for a rainy day. Now you’re ready to sit down at the table. The experts might have different tastes, but they all agree on one thing: You have to know what you’re ordering.

In other words, if you don’t understand what you’re investing in, you might make some mistakes.

“The power of investing comes from compounded returns and time, and if you don’t understand what you’re doing and you’re afraid to ask questions, when the inevitable hiccup comes in the market,” Thakor says, “you will be more likely to change your course.”

Updated on July 6, 2020: This story was originally published on April 10, 2020 and has updated to include more current returns data.

Smart Ways to Invest $10,000 in 2020

Michael-Ledray / Getty Images

Not everyone has $10,000 lying around, but if you recently came into some money—maybe through a bonus or big promotion at work—then it’s time to put that cash to work for you. You can get started by steering the money into the following investments.

One sure way to make your money grow is by investing in opportunities that help you earn compound interest—or interest on your interest. For instance, if you put $10,000 in a savings account with an interest rate of 1.85% that compounds annually, you’ll earn an additional $2,011.86 in 10 years—without doing a thing. U.S. Securities and Exchange Commission offers a Compound Interest Calculator to help you figure out how much you can earn.

A 401(k) Plan

Popping money into your 401(k), or employer-sponsored retirement plan, is always a good idea. Your 401(k) plan will likely handle your investments for you, putting your cash into a carefully considered mix of stocks, bonds, and funds that will maximize your long-term growth. Plus, some companies offer to match 401(k) contributions. If your company matches up to 6% of your contributions, for example, then your $10,000 401(k) deposit instantly becomes a $10,600 deposit. 

The Stock Market

The average annualized total return for the S&P 500 index from 1929 through 2020 was 9.6%—that makes the stock market a pretty good bet. In 2020 alone, the S&P 500 returned 31.1%. It’s important to remember, however, that past results aren’t indicative of future performance. Stocks suffer through rough years and broad downturns from time to time. In 2020, for example, the S&P 500’s annual returns were negative (roughly -4%).   But if you can afford to not touch the money for at least a few of years, the stock market is likely a good place to invest that $10,000.

Real Estate

Although $10,000 isn’t usually enough to invest directly in the real estate market, it is enough to get you into a real estate investment trust (REIT) or real estate-themed exchange-traded fund (ETF). REITs and real estate ETFs are both essentially investments in the groups that deal in real estate, whether it’s home-flippers, real estate agencies, or rental unit management. Both investments offer benefits any investor would love, including high liquidity (they’re easy to trade, like a stock or a bond), diversification (most funds include a wide variety of real estate investments), and, perhaps best of all, you don’t have to actually get your hands dirty rehabbing or repairing a home. 

Individual Retirement Account (IRA)

An individual retirement account can offer access to solid stock and bond market returns, along with significant tax advantages. That’s because the government wants you to save for retirement, so it offers tax incentives for people who contribute to their IRA. You will pay taxes on the money eventually, but for most people, IRAs will help them ultimately save on taxes and prepare for retirement. In 2020, the maximum amount you can put into an IRA is $6,000 if you’re younger than 50 years old. If you’re over 50 years old, you can make an extra “catch-up” contribution of $1,000. 

A “Robo” Investment Account

Robotics-based investment accounts, also called robo-advisors or “robos,” offer an easy way for novice investors to put that $10,000 to work. Robo-advisory firms like Betterment and Wealthfront are user-friendly and do most of the investment work for you. Most services simply require you to answer simple questions before choosing your investments through automation technology. They also may periodically rebalance your portfolio. Another benefit to robos is that their fees are often lower than those of a traditional advisor, and you likely won’t have to pay trade commissions (because you won’t be making trades yourself). 

Invest in Yourself

The financial markets aren’t the only place you can get a good return on your money from a $10,000 investment. You can go back to school or take online classes to earn a degree and add value to your career prospects. If you don’t think a new degree will help your career, then you might consider professional designations and certification programs that could lead to a higher income and more career satisfaction. The return on this type of investment might not be as easy to measure in dollar amounts, but it can still be very beneficial.

Reduce Credit Card Debt

One last way to use $10,000 to your advantage is to pay down significant debt. Paying off thousands of dollars in credit card debt can help improve your credit rating, as well as curb or eliminate the high interest rates you may be paying on your debt right now. Once you can take credit card debt payments off your monthly budget plan, it’ll add to your overall income—and take the stress of debt off your mind. The same goes for other forms of significant debt, like student loans or mortgages. In this case, you aren’t measuring the compound interest of your returns, but the compound interest you won’t have to pay on every dollar of reduced debt. 

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