You know how I offer a lot of hypothetical advice on this blog?

Like, “Say you don’t know whether you need a Roth or Traditional IRA … ” or, “Say you want to punch your coworker in the face.”

Hypothetical, right?

This is not that kind of post.

This is the real deal — I am genuinely exploring the best way to invest $5,000. There is real money on the table and there are real consequences.

That all came across as a little hardcore when I read through that again, so let me clarify: Nobody will die if I make the wrong choice, but I’d really rather not lose $5,000.

Glad we got that cleared up.

Since we’re clarifying, let me say that this is not official investment advice. I am not authorized to offer that.

But what I can do is talk through my decision-making process and give you a behind-the-scenes glimpse into my head. Well, not really — if that were the case, you’d have to elbow past a lot of Taylor Swift lyrics, replays of the Sound of Music and incomplete punchlines that are waiting for their moment.

The inside of my head is entertaining, though quite possibly insane.

I’m working through a very real pro/con list of how to invest $5,000, and thought you should come along for the ride. If you’re investing, though, you need to consider your unique goals and priorities. And I’m not just saying that so that you don’t try to sue me for bad advice.

I’m saying it because in the end, personal finance is pretty darn personal — a decision like this is dictated by a range of factors like how old you are, how risky you are, how fast you’d need that money and more. I only know the answers to those questions for me and my family, so we gotta do us, and you gotta do you. Fair?

To determine how to invest $5,000, here are the questions I’m asking myself:

1.) When do I need it?

I’m not positive about the answer, but I know we’d be willing to leave it alone for at least 5-10 years. That doesn’t mean we HAVE to leave it alone for 10 years, but it does mean we won’t panic and take it out of the market if there’s a big dip within six months. [This is an important question because if I have 5-30 years, I’ll be able to withstand market volatility. If I definitely needed to use this money in two years, a market crash would impact me a lotttttt more.]

2.) Is this your only $5,000?

What’s the emergency fund situation? What’s the general savings situation? For the two of us here, we’re covered on both counts. We have a pile of savings for a big purchase like cars/a house, savings for random things like travel and general adulting, and we have a separate emergency fund. So NO, this is not the only $5,000 we have to our name.

[This is important to note because otherwise, an emergency fund is where I’d start with my $5,000.]

3.) Where are we with the whole retirement thing?

My husband and I have fairly robust retirement accounts for people our age. I already contribute to my 401k through work and get the matching amount from my employer. I also have a Roth IRA account, and my husband has a 401(k) with (even better) matching. We won’t be retiring any time in the next five years, but we aren’t woefully unprepared either.

[This question is relevant because if we didn’t have any type of retirement account set up but had an emergency fund, this is likely where I would start with my initial $5,000. ]

RELATED READ: Will you be prepared for retirement? [Hint: 42% of millennials haven’t gotten started.]

4.) What’s going on with any debt?

While we do have a significant amount student loans, we don’t have any other debt — no car loans, mortgages, consumer debt, etc. I won’t fully detail in this post why we are not using this $5,000 for student loans, but know that it has been thoroughly considered.

If you’re in a similar situation, consider your own interest rates.  

Do you have credit card debt with a 15% APR? You need to crush that before you take on any other investments. Otherwise, you’d be wildly (and MOST likely incorrectly) guessing that you’d get greater than 15% return on your investment elsewhere. That’s … pretty high.

Adjusted for inflation, the stock market’s historical average annual return is in the neighborhood of 7%.

In the case of the 15% credit card debt, it would be wiser to pay that off entirely and THEN invest.

RELATED READ: APY vs. APR: How They Work, What's the Difference & What They Mean For You

5.) What would I do if I lost it all?

Would it ruin me financially?

See #2 and #3. No. I’d really rather NOT watch $5,000 disappear, but we would be able to recover financially.

OK, now that I’ve worked through some of the key considerations for investing, let’s look at some of the top places I could put my money:

Pros & Cons of Investment Options For $5,000

Option #1: High-Yield Savings Account

See this magazine? It’s from 1987.

My dad brought it to me so that we could FREAK OUT about how high the return was on a money market account.

I tell you what, I have a money market account currently. It earns closer to 0.5%, which is pretty pitiful by comparison.

At the risk of sounding like your great Uncle Bob, let me just say that these types of savings accounts just aren’t what they used to be in the good ol’ days.

RELATED READ: Online Bank vs. Traditional Bank — Which is better?

There are some solid high-yield savings accounts and CDs available, and you can easily get around 2.20% APY with an online bank account. It’s probably the lowest risk you’ll ever take with your money. And for someone who might buy a house in the next year or two, might need to quit a job, or might incur hefty unexpected expenses (which, to be honest, sounds like a lot of my friends in their 20s), there’s a lot of value in that flexibility.

PROS

• Least risky of all of the options

• You know exactly how much you’ll get

• Easy, one-time set-up
  

CONS

• It’s pretty much guaranteed that you won’t make a lot of money. You won’t lose any, but you won’t make much.

SUM: Low risk, low reward — a safe play.

RELATED READ: How Did People Invest Before the Internet?

Option #2: Real Estate

If we’re looking purely at the getting the highest amount of money for the least amount of work, real estate might not be the pick. And it might be hard to get anywhere big on your own accord with $5,000. (In other words, $5,000 is not enough to buy a house outright that you could then rent out to tenants. You could still buy a house probably, but it would require loans and that’s just a whole different conversation. I am not in a place financially to buy a house that I don’t live in, or in a place to physically/logistically maintain it)

For this exercise, let’s assume that my real estate investment would not be in the form of buying and renting or buying/flipping a house. It would be in a fund that invests in real estate.

There are services like Fundrise, which is a way to invest in private market real estate — AKA not traded publicly on the stock exchange. I know VERY little about all this, but according to their website, “Fundrise democratizes access to this once-unattainable asset class, making it possible for anyone to become a real estate investor regardless of income or net worth.”

And, that “by pursuing a private market, direct investment strategy, Fundrise portfolios earn higher annual current income than public income-focused investments.”

My immediate question is: Are they required to disclose detailed performance reports if it’s in the private sector? How does all that work?

Lots of questions, lots of reading to do, but intrigued.

Speaking of the public market…

Enter, REIT: real estate investment trust.  REITs allow average investors to invest in portfolios that are comprised of real estate assets in the same way you’d invest in a mutual fund. Here’s a hypothetical example: A bunch of investors chip in and buy “stock” in a real estate portfolio; a company uses that investor money to buy/renovate an apartment building; the investors get a piece of the profits, just like with mutual funds.

To be honest, real estate investing is the option I know least about. And for that reason alone, I’ll come right out and say I won’t be investing in anything real estate-related with this chunk of change.

There are some situations I know of that have worked out for the investor in big ways, and in a relatively short timeline. I’m not that confident in my knowledge surrounding this option yet, and would want more time to learn about this. Maybe a day will come when I’ve done more research, have more experience or land in a deal I can handle!

PROS

• Potentially fast/higher return on investment

CONS

• No diversification — all $5,000 goes to a market segment that isn’t stable 100% of the time

SUM: I … just don’t know what I’m doing.

Option #3: Mutual Funds

A mutual fund pools the money from several investors and spreads it across stocks, bonds and other assets.

Remember the gift basket analogy?

Here’s another one: Mutual funds are an artisan cheese board.

You have some safe bets — cheddar, brie, the always crowd-pleasing Club crackers.

You spice it up with some roasted eggplant spread and sliced figs. And then you really get wild with a stinky blue cheese that could be a total hit, or could be a major party foul — high risk, high reward. But in the end, it doesn’t really matter and you come out on top because 90% of your cheese board performed super well.

Mmmmm, snack break, be right back.  

Ok, HI I’m back, brie in hand.

What were we talking about?

Oh yeah — mutual funds are a great way to get a little bit of a lot of companies, which lowers exposure and lessens risk overall.

PROS

• Super versatile and diversified

• Professionally managed (no investment knowledge, no problem!)

• Little to zero research required

CONS

• Fees (someone has to do the management, and if it’s not me, then I’m paying for it)

• Not as advantageous if I need to take my money out soon

• Exposure to risk — even with a diversified portfolio, there is a level of risk in stocks

SUM: Mutual funds might be a good option, especially considering my age/timing/willingness to stay in it for more than five years. The fees are the biggest hold-up for me.

Option #4: ETF

As you’ll recall from the MFM Intro to Investing article, ETF (AKA an exchange-traded fund) is a basket of investments that have been pooled together, all bundled into one neat and tidy fund. Then, that fund is traded on an exchange (as in, the New York Stock Exchange). By buying a share in an ETF, you’re claiming a stake of that fund’s total assets.

This is super similar to actively managed mutual funds, with one major difference: ETFs are not actively managed.

And you know what that means?

YOU have to do the active managing.

That doesn’t require a crazy amount of work, but it does mean I’d have to be a little more hands-on with handling the portfolio. And, I’d definitely have to rebalance my portfolio at least once a year.

For someone who is so unbearably controlling particular about how the plates are stacked away and which pens to use on her daily planner, I am shockingly uninterested in having total control over my investment portfolio.

PROS:

• Lower costs than actively managed funds

• High diversification — the risk is spread out over many stocks/companies

• Liquidity — I can sell it pretty quickly if I ever truly needed to

CONS

• More research/work required on my end.

• Commission fees can sneak up if you invest a little at the time (though I wouldn’t be, in my case)

SUM: ETFs might be a good option for someone my age with a willingness to stay in it for more than five years (and still have the option of getting your money out if necessary). The hands-on aspect is the biggest negative for me.

Option #5 - Index funds

Couldn’t decide on a joke, take your pick:

If the stock market were Hollywood, index funds would be dystopian action movies. So hot right now.

If the stock market were Hollywood, index funds would be Ryan Reynolds. Everybody wants to get their hands on ’em.

If the stock market were Hollywood, index funds would be the high slit of a 2019 red carpet gown. Everybody’s got one.

Index funds are designed to mirror the performance of a benchmark index.

Quick recap: Here’s the gist of what “tracking an index” means:

An index is essentially a group of investments that represent a market segment. That way, investors can gauge the performance of that market segment by using the index as a benchmark, or comparison tool. Based on the indexes, investors make decisions on where to invest their portfolio.

The simplicity and low cost of index funds make them an ideal investment for people who don't want to spend a lot of time researching stocks and managing their portfolio (**raises hand**). And, since index funds are a passive investment, I won’t be paying fees left and right fund managers actively trying to “beat the market” (they only beat the market 1 in 20 times anyway, apparently).

PROS

• Low fees

• Low long-term risk — consistently good performance over time

• Easy, peasy passive management — very hands-off

CONS

• Volatility (remember 2008?) — like any other stocks, those in index funds are at the mercy of the market. Big highs, low lows — and I must be willing to ride that out.

• No chance to wildly outperform the market. Results will most likely be solid over time, but I wouldn’t be hitching all my stars to another baby Amazon like I potentially could with a single undervalued stock with the potential to soar in the next decade.  

• No control over the holdings — I know, this is listed as a pro and a con. On the one hand, I don’t have to control everything and do hours upon hours of research on thousands of companies. On the other, if one slice of my portfolio is a corporation that I ethnically/religiously/morally disagree with, I can’t just remove that one company from my lineup. [Learn more about socially responsible investing here.]

SUM: Not the sexiest option, but index funds are a solid choice that are pretty reliable over the long term and aren’t intimidating to a point that I’m too scared to try.

Whew!

Those aren’t all possible investment options, ever, but they are the ones I’m considering for my own money.

OK, so here’s a thing I want to ask but am a little afraid to because the internet is scary:

What do you think I should do with my $5,000?

It’s hard to answer that, I know, because context is so crucial. But only knowing what you know based on what I’ve described, how would you proceed? Let me know in the comments below what your top picks are!