Q: I have $1000 I would like to invest. What type of investment you think I can do that will yield the highest (return). I am saving to buy a house and hope to do so by next year.
A: Before you invest $1,000, I’d suggest taking care of five financial basic:
1) Paying off credit card debt
2) Have a “rainy day” fund of up to $1,500 to deal with any unplanned, short-term emergencies
3) Creating a will
4) Having life insurance
5) Getting disability coverage
If you’re covered on all those areas, then you can think about investing.
The first two questions you must ask yourself are:
1) How long am I planning to invest this money?
2) How much risk can I tolerate?
Since you said you want to buy a house in a year or so, it’s really not appropriate to tie that money up into longer-term savings vehicles, like CDs that mature in longer than 1 year.
At the same time, you don’t want to put the money into anything too aggressive, like a stock fund, or individual stocks, if it’s money you really need to use for the down payment on your home or for closing costs.
You have to realize that risk and reward go hand in hand. The riskier investments may pay higher yields (i.e. better returns, or higher interest rates) on your money, but they also pose the biggest threat to you.
Simply put, the riskier an investment, the less likely you will see all of your money returned to you. Put another way: the riskier an investment, the greater the chance you could lose some or all of your cash.
Unless you’re willing to cope with the risk of losing your house-savings, I wouldn’t really put that $1,000 in the stock market. I’d put it in a high yield savings account to make sure it was there when I needed it a year from now.
For anyone with a longer time frame, say 3 years or more, then I’d suggest taking that $1,000 and putting it into an index mutual fund. Find a good-performing fund that tracks a major index, like the S&P 500, and give your $1,000 investment time to grow. All the major mutual fund companies offer low-cost index mutual funds.
Recommended reading and video: Investing Success