Unlike with a savings account , every dollar isn't guaranteed to be there in a few months, or even a week. But staying out of the stock market poses an even bigger risk to the prospect of building wealth than diving in, experts say.
"Opportunity cost is that unseen payoff you miss out on because you're busy doing something else," certified financial planner Jeff Rose explained in an article for Business Insider.
"You can think of it as the answer to the question, how much more would I be ahead if I chose a different path?In my own young life, the biggest opportunity cost or financial mistake was not opening a Roth IRA when I was 18 or 19 years old," Rose wrote.
Where to invest your money
First: Consider retirement savings
A Roth IRA is a tax-advantaged retirement account wherein your contributions and investment earnings grow tax-free. If your income is below the IRS thresholds , it's a good idea to invest through a Roth IRA, which you can open in a few minutes at any brokerage.
This year, you can put up to $6,000 (or $7,000 if you're over age 50) in a Roth IRA. It's different than a 401(k) or other employer-sponsored retirement plan because you make contributions on your own time, and not through paycheck deferrals.
Next: Open an investment account
If you've got a handle on your retirement savings and you're looking to invest extra cash for more short-term goals, you might consider opening a self-directed investment account at a brokerage or online adviser. The most important thing to know about this type of account is that it's generally taxable. If your investment yields returns and you sell it, you'll be taxed on your earnings.
The 'best' place to invest depends on your time horizon and risk tolerance
There are so many ways to grow your money in an investment account. The best choice for you will depend on when you'd like to spend the cash you're trying to grow and how much risk you're comfortable taking on when you consider the potential reward.
Where you should invest also depends on whether you want to be an active or passive investor. Basically, do you want to pick individual stocks or funds on your own or have an automated investing service do the work for you?
Here are five options for investing $1,000, ordered from least to most active.
How to invest $1,000
1. Algorithm-based portfolio
If choosing individual investments to build your own portfolio doesn't appeal to you, so called robo-advisers are a great option for a hands-off strategy . They use computer-based algorithms to design personalized portfolios for investors based on their goals, time horizon, risk tolerance, and other investing preferences.
Instead of picking out index funds or exchange-traded funds (ETFs) on your own, you'll get a portfolio made up of multiple funds, increasing your diversification and minimizing overall risk.
Most of these online advisers think: Wealthfront and Betterment also automatically rebalance your portfolio as the market ebbs and flows to retain your original stock/bond mix, harvest tax losses, and don't require a big balance to get started.
Who it's good for: Anyone who wants to invest for a specific goal but doesn't want to worry about having to pick the right asset allocation or monitor a portfolio.
Who it's not good for: If you would like more control over your portfolio, such as which funds you invest in and when you buy or sell, then an algorithm-based, automatic investing service that does most of the legwork probably isn't your best choice.
2. Index fund
Index funds may sound intimidating, but they're really just a type of mutual fund, an all-in-one investment that diversifies your money across a broad selection of stocks or bonds. Rather than choosing and buying individual stocks, an investor owns a small piece of every company or asset in a certain financial market. The goal is to match the return of the overall market you're invested in rather than placing bets on singular parts of it.
Legendary investor Warren Buffett once said "a low-cost index fund is the most sensible equity investment for the great majority of investors." Financial planners largely agree : Not only is it cost-effective, but investing in an index fund is easy to understand and requires little to no ongoing maintenance.
You might also consider an exchange-traded fund (ETF), which can also track an index. The distinguishing factor between an index fund and ETF is that an ETF trades like an individual stock throughout the day, while an index fund is a mutual fund that can only be bought or sold at the end of each day.
Who it's good for: Anyone looking for a hands-off or set-and-forget investment. Keep in mind that most index funds require a minimum investment to buy into, typically anywhere from $1 to $3,000. ETFs are generally cheaper because they're priced as one share.
Who it's not good for: If you want to use your money to pick and choose specific stocks, like a share of Disney or Apple, an index fund won't give you that capability.
3. Target date fund
Target date funds automatically choose a blend of investments based on your age the "target date" refers to the year you plan to retire. Generally, the younger you are, the riskier the investments (more stocks, less bonds). As you approach retirement age, the fund shifts to become more conservative (less stocks, more bonds).
But since a target date fund is technically a fund made up of other funds, it can be costlier than simply investing in an index fund or ETF. It's also not the most personalized option out there.
Who it's good for: Young investors might find target date funds are a good entry point to the market, particularly if retirement is multiple decades away.
Who it's not good for: Someone who is looking to invest for a short-term goal or an expense happening within three to five years might be better off creating a personalized portfolio that isn't tied to an ordinary stock/bond mix.
4. Real estate investment trust (REIT)
Equity REITs, the most common type of REIT, allow investors to pool their money to fund the purchase, development, and management of real-estate properties. A REIT focuses on a specific type of real estate, such as apartment complexes, hospitals, hotels, or malls. Ninety percent of annual earnings usually in the form of rental income are returned to the investors as dividends.
If you want to keep your investment liquid, stick to publicly traded REITs. You can also get immediate diversification by investing in index funds or ETFs that are made up of different REITs.
Who it's good for: Someone who wants in on the real-estate market but doesn't have enough cash to buy an investment property. Real estate has a low correlation with stocks and bonds, so including a REIT in your portfolio can help minimize overall risk.
Who it's not good for: If you're more interested in long-term growth than generating cash flow through your investments, a REIT might not be the best choice. REITs pay dividends regularly and are taxed as income, unless they're held in a tax-advantaged retirement account.
5. Individual stocks
Stock trading is not child's play . Instead of buying into a fund that includes shares of several companies, you're choosing which specific companies to buy. That leaves the task of diversification up to you, like making sure all your money isn't sitting in one industry.
One of the behaviors that experts tend to warn against timing the market is almost unavoidable when you're managing a portfolio of individual stocks. You often have to decide where you think the market is going and speculate how the companies you're invested in will react.
Luckily, most brokerages have eliminated trading fees, so individual stock trading is not as expensive as it once was. You can also buy fractional shares, or smaller bits of companies, through many of the online investing startups, such as Robinhood.
Who it's good for: Investors with time on their hands. In order to stay on top of your investments, you usually have to keep tabs on market research and news and decide when it's a good time to buy or sell.
Who it's not good for: If you would prefer to set your investments on auto-pilot and leave the task of diversification to the pros computerized or otherwise then individual stock picking isn't for you.
