Where to invest $5,000 (2024)

If you’re a new investor with $5,000 to put into the market, you may be wondering what your options are.

There are plenty of investments you can make, but you’ll first need to consider whether you want to put your money in a taxable brokerage account or a tax-advantaged retirement account. In that latter case, you can’t withdraw until you’re 59 1/2 or older, but the tax benefits can be significant.

Either way, an initial $5,000 investment has the potential to grow into a much greater sum over the long term.

1. Invest in your 401(k)

If your employer sponsors a 401(k) retirement savings plan, consider contributing the maximum the Internal Revenue Service (IRS) allows. For tax year 2024, the maximum employee contribution limit is $23,000 (or $30,500 for those 50 and older).

“Your 401(k) is like a secret weapon for building a secure financial future,” said Shinobu Hindert, a certified financial planner (CFP) and author of the book “Investing is Your Superpower.”

Investing $5,000 in a 401(k), she said, means not only saving for retirement but also taking advantage of potential employer matches and tax benefits.

“Think of it as getting free money while your investments grow tax-deferred,” Hindert said. “Start by contributing enough to get the full employer match if available. That’s your first power move. Then, diversify within your plan by choosing a mix of funds that match your risk tolerance and time horizon.”

She added that most 401(k) plans offer age-based funds for investors who want to put their account on autopilot, without the need to rebalance periodically.

“These funds automatically adjust your portfolio over time. For example, if you’re 30 years away from retirement, they will primarily consist of stocks,” she said. “As you approach retirement, your stock exposure will decrease to align with your age and proximity to retirement. Your future self will thank you for this smart, strategic step.”

2. S&P 500 index funds

One of the most popular investments for both new and seasoned savers is an S&P 500 index fund.

The largest exchange-traded funds (ETFs) include the SPDR S&P 500 ETF Trust (SPY), the iShares Core S&P 500 ETF (IVV) and the Vanguard S&P 500 ETF (VOO). They all track of large-cap domestic stocks.

“Investing in an S&P 500 index fund is like owning a piece of the 500 most powerful companies in America,” Hindert said.

“This is a great entry into the world of investing. This strategy allows you to tap into a diversified portfolio that reflects the overall market, reducing risk while capturing growth,” she added.

She cautioned that investors who limit their market exposure to the S&P 500 are taking an aggressive approach, as they are focused on the sole asset class of large US companies.

3. Use a robo-advisor

New investors considering how to invest $5,000 dollars may find that a robo-advisor is a simple choice.

A robo-advisor is an automated platform that uses algorithms to develop and manage a diversified investment portfolio based on a person’s risk tolerance, financial goals and time horizon. Large financial firms with robo-advisor platforms include Betterment, Charles Schwab and Vanguard.

Despite the name, all these companies with robo-advisor services have humans who answer phones and can answer investor questions, although customer service reps generally can’t make changes to these robo-accounts, such as adding ETFs outside the portfolio.

The best robo-advisors offer lower fees than traditional financial advisors and require lower minimum investments, making them a good choice for new investors with $5,000. They also simplify the investment process, offer access to professional-grade portfolio management and help investors sidestep emotional decision-making.

4. Open or contribute to an IRA

An individual retirement account (IRA) is a tax-advantaged vehicle designed to help people save for retirement, while also providing tax advantages.

In a traditional IRA, contributions are tax-deductible, and investments grow tax-deferred. A Roth IRA is funded with after-tax dollars, and withdrawals after age 59 1/2 are usually tax-free.

In 2024, the contribution limit for both types of IRAs is $7,000, or $8,000 for investors age 50 and over.

Roth IRAs also have income limits, which in 2024 are $161,000 for single tax filers and $240,000 for married filing jointly tax filers.

“There’s something really special about the words ‘tax-free.’ A new investor would be missing out if they didn’t take advantage of one of the greatest gifts the government provides, a Roth IRA,” said Tyler Weerden, a financial planner and owner of Layered Financial in Arlington, Virginia.

Because Roth contributions are made with after-tax dollars, contributors who are new to the workforce or who expect their income to rise over time can pay a lower tax rate to fund retirement than they might in the future.

“Many investors fill up their Roth IRA bucket after getting their employer retirement plan match, versus contributing more to their employer plan, due to the vast investment options, rock-bottom fee and flexibility of Roth IRAs,” said Weerden.

5. Investing in commission-free ETFs

ETFs that track an index are generally a low-cost way for investors with $5,000 to access the market.

In addition, investors should try to avoid paying a commission to a broker whenever possible.

Brokerage firms that offer commission-free trading of both stocks and ETFs include Charles Schwab, Fidelity, Merrill Edge, E*TRADE and Vanguard.

When combined with the low expense ratios of index ETFs, commission-free trades mean more money ends up in the investor’s pocket, rather than a fund manager’s or broker’s. Low fees help protect the growth of your account value over time.

6. Nasdaq 100 index ETFs

The Nasdaq 100 is an index of the 100 largest non-financial companies listed on the Nasdaq exchange.

It’s a market-capitalization-weighted index and in recent years has been technology-heavy, as the tech sector has dominated broad market performance. When the “Magnificent 7” stocks led the market throughout much of 2023, all were top components within the Nasdaq 100.

The largest ETF tracking the Nasdaq 100 index is the Invesco QQQ Trust ETF (QQQ), with about $275 billion under management as of June 2024. Top components include:

Investors who want to put $5,000 to work in the market might consider a Nasdaq 100 index ETF as an easy way to access fast-moving tech stocks and other growth industries.

7. International index funds

US investors and investors in other developed markets generally gravitate toward stocks of companies headquartered domestically. That’s a phenomenon known as “home country bias.”

In the past decade, US stocks have outperformed international stocks, giving US investors good reason to focus on domestic equities.

However, many financial advisors suggest diversifying with international stock index funds to smooth returns during periods when US stocks underperform.

“There’s no way around it: International stocks aren’t the most popular with US investors today,” said Weerden.

“Many argue that US investors don’t need to own international stocks due to the fact that US companies sell a large number of their products overseas,” he added. “However, it’s not that simple. Lower non-US stock valuations and higher future expected growth support the argument that ignoring international stocks is short-sighted.”

Throughout recent history, there have been times when international stocks outperformed. For example, the iShares MSCI EAFE ETF (EFA), which tracks the performance of a basket of international developed market equities, outpaced the SPY ETF in 2017 and 2022. In those years, non-US developed market stocks provided overall portfolio diversification.

“If you started investing after 2010, you might think big tech companies are the only way to invest since they’ve done very well over that period,” Weerden said. “However, if you look at history, you’ll see periods where international stocks outperformed US stocks. Don’t invest for the long-term with short-term recency bias.”

8. Sector ETFs

Sector ETFs offer another way of slicing and dicing the broader market to focus on outperforming industries.

For example, an investor who’s interested in narrow exposure to the technology sector can purchase shares in the Technology Select Sector SPDR ETF (XLK). More income-oriented investors might turn to the Utilities Select Sector SPDR ETF (XLU) or the Real Estate Select Sector SPDR ETF (XLRE), which both hold many dividend-paying stocks.

To benefit from a focus on sector ETFs, investors should consider rebalancing regularly, as sectors can quickly rotate in and out of leadership.

9. Thematic ETFs

A thematic ETF tracks a specific investment theme or trend. For example, the Global X US Infrastructure Development ETF (PAVE) invests in companies that may benefit from growth in infrastructure spending in the US.

Portfolio companies hail from industries including raw materials, heavy equipment and construction.

A well-known thematic ETF is the ARK Innovation ETF (ARKK), which invests in domestic and foreign stocks of companies involved in what investment manager ARK Invest calls “disruptive innovation.”

“Thematic ETFs are an excellent way for investors to focus on specific trends or sectors they believe will outperform in the future,” said Celine Dutoit, financial research analyst at Magnifina in New York City.

“For young investors looking to invest $5,000, thematic ETFs offer a way to target growth areas without the need to pick individual stocks,” she added.

10. Trade stocks

Financial advisors often discourage clients from actively trading stocks, but the rise of investment apps such as Robinhood and WeBull has made trading popular among young and new investors.

Because single stocks inherently carry more risk than a basket of securities, such as an ETF, investors should consider trading more as entertainment than investing.

“Despite mainstream advice from financial planners, I don’t think stock trading is the end of the world, in moderation and only after meeting certain conditions,” Weerden said.

“If a new investor really has an itch to try their hand at individual stock picking or wants to join the latest meme craze, I would suggest taking 5% of that $5,000 or $250 at most, and have fun with it,” he said.

Weerden added that he would advise stock trading only to an investor who has adequate cash reserves, is contributing enough to a 401(k) to get an employer match, has no high-interest debt and has positive monthly cash flow.