With the stock market near all-time highs, investing may seem easier than ever. But fear of buying at a high can paralyze you with fear. As the season of big tax refunds bestows some windfalls on many fortunate people, I've come up with five ideas on how you can put $5,000 to work today.
1. Pay down debt.
Paying off debt may not seem like investing, but often, it's the best investment you can make. Consider: If you carry a balance on a credit card charging 18% interest, paying it down is like earning 18% on your money -- tax-free. It's impossible to find a better deal than that.
Paying down lower-rate debt doesn't give you the same payoff, so you might be better off keeping the debt and investing instead. But the higher the interest rate on your loans, the smarter it is to get them paid off as soon as you can.
2. Open an IRA.
The best way to move forward with your finances is to take advantage of the tax benefits of retirement accounts. With $5,000, you'll be able to max out an IRA for the 2012 tax year -- which you can still do through April 15. If you've already contributed to an IRA for 2012, you can get most of the way to the higher $5,500 limit on 2013 IRAs.
With two types of IRAs to choose from, your individual situation will dictate whether it's smarter to go with a Roth IRA or a traditional IRA. The plain-vanilla IRA gives you an up-front deduction for your contribution, which on $5,000 can save you anywhere from $500 to nearly $2,000 in taxes -- a reduction that can apply to the tax return due this April if you treat your deposit as a 2012 contribution. By contrast, the Roth IRA won't give you an up-front deduction, but unlike a traditional IRA, the Roth offers tax-free withdrawals of contributions and the income they generate when you reach retirement.
3. Look at low-cost commission-free ETFs.
Index-tracking ETFs are among the most efficient, lowest-cost options for investors. However, paying commissions to buy and sell ETFs can take a big bite out of a modest investment.
Thanks to deals with brokerage companies, though, you can invest in certain ETFs at no commission. For instance, Fidelity's recent agreement with iShares opened up a host of new commission-free ETFs for Fidelity customers, including the income-rich iShares S&P U.S. Preferred Stock ETF (NASDAQ:PFF), which offers the higher dividend yields that preferred shares give investors compared to their common-stock counterparts. Combined with existing offerings that include the dividend ETF iShares DJ Select Dividend (NASDAQ:DVY) and the general bond-index tracker iShares Core Total U.S. Bond Market (NYSEMKT:AGG), it's easy to put together a diversified yet customized portfolio, with $5,000 spread across several different ETFs.
Many other brokerage companies offer similar commission-free ETF deals, so check with your broker or look at a range of different providers to see which one best fits your needs.
4. Look for great stocks that are well off their highs.
Even when markets are high, some stocks inevitably aren't. For instance, Chinese Internet giant Baidu (NASDAQ:BIDU) has lost 45% since its highs, as competition in the search and browser space gets fiercer in the emerging market. Yet with such a big price decline, Baidu investors are essentially discounting just about every bit of future growth that the company will ever earn. Projections that imply that Baidu will simply stop growing are ridiculously unrealistic, and barring a big collapse in the Chinese economy overall, Baidu should reassert its dominance and bounce back.
Similarly, Silver Wheaton (NYSE:SLW) has struggled due to falling silver prices, but its distinctive silver-streaming strategy allows it to avoid the pitfalls that traditional mining companies face from high production costs and labor issues. Traders tend to link it to silver's movements, but with the company having scored lucrative deals, it looks attractive at a 25% discount to its yearly high.
5. Keep it in the bank -- but make a plan
As unsatisfying as it is to have money in a savings account earning next to nothing, there's something to be said for keeping money available for future investment. But even if you don't invest now, you should work on a plan to decide how you're going to invest it when the time comes.
In that plan, you should choose investments to watch and work out what conditions you want in place when you finally pull the trigger and buy. Waiting for a market correction doesn't always work, because stocks can go a long time without correcting. But if you're patient, you'll eventually get the portfolio you want set up and working for you.
Get smart with your money
Don't let the pressure of not wanting to waste a big wad of cash keep you from making any moves at all. Even with stocks near record highs, you can still make smart investments with your money.
Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.