Q: I want to start investing now, but only have about $1,000 to invest. What should I do?
You don't need a ton of money to start investing. Your $1,000 is more than enough to start with, and there are some great ways you can put that money to work.
The biggest drawback to starting with a relatively small amount of money is that buying individual stocks isn't very practical. Brokerage commissions have certainly gotten cheaper, but a properly diversified portfolio should have five or six different stocks at a minimum. Based on a $7 average commission, spreading your money among five stocks would cost you $35, and you'd be starting out 3.5% in the red.
However, by investing in mutual funds or ETFs (exchange-traded funds -- basically mutual funds that trade like stocks), you can put nearly all $1,000 of your capital to work right away in high-potential investments. Here are some of my favorites for beginning investors:
The Vanguard S&P 500 ETF (NYSEMKT:VOO) is a great starting point. It invests in all 500 companies that make up the S&P 500 index, and has a rock-bottom 0.04% expense ratio. This fund lets you benefit from the market's gains, which have historically averaged nearly 10% per year, without too much exposure to any one stock. In fact, Warren Buffett has said that a low-cost S&P 500 index fund like this is the best investment most people can make.
If you're younger and want to take a more growth-oriented approach, the Schwab U.S. Large-Cap Growth ETF (NYSEMKT:SCHG) is just as inexpensive, but focuses on growth-oriented stocks. Top holdings include companies like Apple, Amazon.com, and Facebook. And since the fund holds more than 400 different stocks, you can benefit from these companies' rapid growth rates without depending too much on any single company's performance.
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