How to Invest Your Money in the Best Way
2017 was a banner year for the financial markets, with broad indices like the S&P 500 up as much as 20% or even more.
Yet returns for many individual investors were not nearly as dramatic. According to OpenFolio, the average investor earned about 10% on their money through early 2018, with the S&P up 23.58% during the same period.*
10% isn’t bad, in historic terms, but what if you want to do better? Let’s look at some of the ways you can invest in 2018 and beyond, from worst to best.
We’ll suppose you have exactly $1,000 and want to make an investment in the financial markets.
Determining how 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 how to invest your money.
10 ways to invest $1000 (ranging from the worst to best ways on how you should invest your money):
Buy Penny Stocks
When determining how 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.
These are just a few of the reasons to to stay away from penny stocks.
Hire a broker
As mentioned above, the S&P 500 was up 20% in 2017, and you could have matched those gains simply by buying an index fund. So why did the average investor do so poorly?
Perhaps they tried to “second-guess” the markets, getting out of winning positions too soon or sticking with losers for too long.
They may also have invested based on tips they saw in the media, read in books or heard about from their neighbor or brother in law.
They may also have invested with an advisor who charges a fee, or a commissioned broker. The more you pay these professionals, the less of your money you keep.
True, a good broker can perform a valuable service. But a broker may also make recommendations based on what is best for their interests (by earning them a bonus or boosting their company’s profits), instead of your interests.
Unless you can tell the difference, you might be better off learning to manage your own money.
Buy Cryptocurrency Bubbles
Buying Cryptocurrency (or another fad) based on emotion, not knowledge is always a bad idea.
Bitcoin seized the imagination of the person in the street when it soared from a few hundred dollars to nearly $20,000 at the end of 2017.
Those who bought at the top, would have had a gut wrenching roller coaster ride as it quickly lost half its value.
Regardless of where Bitcoin is priced when you read this, there are sound reasons not to jump onto a bubble like this and buy based on emotion rather than a logical study of the markets.
True, Bitcoin and other cryptocurrencies are indeed exciting because they may be shaping up to be the first entirely new asset class to come along in many years.
Cryptocurrencies are not backed by governments or hard assets, but by blockchains; incredibly complex databases that record and share transactions.
Crypto has real potential for future technologies, including secure transfers of money, and banks and retailers are seriously studying it.
They are however, extremely volatile and risky, and there is a high potential that most of the cryptocurrencies today will be gone five years from now.
Those who want to invest in cryptocurrency would be better off learning about the risks and analyzing likely price movement based on supply and demand first.
Jumping in without doing your research though would essentially move this investment opportunity to the bottom of this ways to invest $1000 list.
Hire a Robo-Advisor
Robo-advisors appear to be an attractive new alternative for beginning investors or those with limited capital.
You choose an investing profile (which will combine your acceptable degree of risk and the timeframe for your investing), and a computer algorithm works on your behalf to make the best investments for your needs and adjust them as conditions change in the financial markets.
Fees are much lower than for traditional advisors, and can be waived entirely once your portfolio reaches a certain size.
The drawbacks of robo-funds are the same as the benefits, however: you don’t actually see how the funds are invested, and you usually can’t turn to a live human if you need advice. And the biggest decision of all—which of the increasing number of robo-funds to invest in—is still up to you.
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).
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
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.
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.
Buy 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.
The Best Way to Invest - Don’t buy anything—until you invest in educating yourself about the markets
Many brokerages and platforms offer test accounts where you can trade with play money, the equivalent of Fantasy Football, until you become experienced with the ebb and flow of the markets and the behavior of individual ticker symbols.
Or $1,000 could be used to learn how to invest in stocks and other investment courses.
Online Trading Academy offers comprehensive trading and investing education for traders and investors of all levels of experience.
And you can get started for FREE by attending a half-day class in your area.
As we’ve seen, there is no magic bullet investment that is going to magnify your money with no downside whatsoever.
There’s always a tradeoff between acceptable risk and potential reward. The “worst” investments are those that reduce your upside—by paying somebody else a portion of your hard earned money to manage your portfolio—without doing anything to take away the risk.
And the “best” investments are those that put you in control — even if you ultimately choose to have someone actually do the investing on your behalf.
Remember, nobody cares more about your money and your future than you do, so do your homework and educate yourself about the financial markets before putting your money at risk!
*Sourced on Fidelity.com, 1/17/18.
Get Started with Your Financial Education