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Exactly How I'd Invest $5,000 If I Had to Start from Scratch Today

By Selena Maranjian – Nov 10, 2021 at 6:06AM

Key Points

  • You'll need to start getting savvier about investing first.
  • You might put your money in an index fund first.
  • You can do very well with just an index fund, but there are ways to aim higher.

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Here are three steps to take, and you only need two of them to start on the path to building wealth.

I've already been investing for many years, and my investments in a wide variety of stocks over several decades are the reason I will be able to retire comfortably -- or at all. Still, it's an instructive exercise to think about what I'd do if I suddenly had some money and I wanted to begin investing in the stock market.

So here goes -- here are three steps I'd take to begin investing in stocks with $5,000 today.

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Image source: Getty Images.

1. I'd start learning

Naturally, the first thing to do if you're approaching the stock market knowing little to nothing about it is to start learning. There are lots of insightful financial podcasts about investing and the business world that you might listen to (some of them produced by us at The Motley Fool), if you're a podcast aficionado.

But I prefer to learn by reading, as it can provide a more organized path through material I want to absorb. (Plus, I just like reading.) There are gobs of books out there on great investors, great businesses, and how to invest. You can learn about how top companies are built and prosper in order to help you recognize greatness when you're evaluating companies. And you can learn about how the best invest -- there are many different ways one might go about it, such as value investing (favored by the likes of Warren Buffett) or growth investing.

You can learn a lot from Motley Fool books, too, and just by reading the many articles available for free on Fool.com.

2. I'd start with an index fund

While you're learning, you may be itching to actually start investing -- after all, you do have that $5,000 in your pocket. Well, a perfect way to enter the market is through a simple, low-fee, broad-market index fund, such as one that tracks the S&P 500 index of about 500 of America's biggest companies. Once you buy some shares, they will quickly be spread across hundreds of companies, and they can start growing for you over time.

You actually don't need to do much more than this. For many, if not most, people, sticking with index funds is a very sound strategy. They will roughly give you the market's return -- while the majority of more costly mutual funds, more actively managed by well-paid and well-educated folks, underperform it.

Index funds also make a lot of sense because many of us don't have the time, skills, or interest to study lots of stocks (and perhaps other investments), decide when to buy or sell certain ones, and then keep up with our holdings regularly, for many years. None other than Warren Buffett has recommended index funds for most people.

By the way, you can invest in index funds through a regular, taxable account or an IRA at a good brokerage, or you might find an S&P 500 index fund among your options in your workplace's 401(k) plan.

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Image source: Getty Images.

3. I'd slowly branch out

But what if you do have the time and interest to become a savvier investor, and you want to aim for market-beating results? Then, once you've read and learned enough to be comfortable with what you're doing, you might add some carefully chosen individual stocks to your mix. You don't need to completely sell out of your index fund holdings: You might just sell a portion, or you might leave your holdings intact and wait until you have a little more money on hand to invest in your first individual stock(s).

A great place to start is with dividend-paying stocks, because they offer a one-two-three punch. First, just as with non-dividend-paying stocks, if the company is healthy and growing, you can expect stock-price appreciation over time. You also receive regular income from the company -- and it will arrive no matter whether the overall market is swooning or surging. (Yes, some companies will struggle now and then and reduce or pause or eliminate their dividends, but relatively few do, and they all try hard not to.) And best of all, healthy and growing companies will also tend to increase their payouts over time.

Those are three good steps to take if you're looking to start investing -- and there's a good chance you only need the first two. If you're not saving and investing for your future, you'll thank yourself later if you start doing so soon.

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