You may be wondering how to best use the $1,400 payment you may have received as a result of the latest round of Covid relief legislation — or maybe you already have big plans for the money. When asked what they're going to do with their stimulus money, many Americans — especially young ones — say they want to turn it into more.
Half of Americans between the ages of 25 and 34 said they planned to spend 50% of their stimulus payments on stocks, according to a recent survey from Deutsche Bank. And 40% of Americans with incomes under $150,000 said they planned to use a portion of their payment to buy stocks or bitcoin, with prospective investors preferring the latter, in a survey from investment firm Mizuho.
It can be a good idea to use a windfall to invest for the future, experts generally agree, but they caution young investors not to take on undue risk by plunging their stimulus funds into any single investment, such as an individual stock or cryptocurrency. Here's how they think you should invest that money to minimize your exposure to market volatility and maximize your chances at building long-term wealth.
Before you even think about investing your stimulus check, you should examine whether it's worth using the money to bolster your emergency fund, says John Wheeler, a certified financial planner and senior financial advisor at Castle Wealth in Indianapolis, Indiana. "The whole point of the stimulus is to help people who don't generally have access to a whole lot of money should things go south, whether it's unemployment or a medical situation," he says.
Financial author and podcaster Suze Orman puts it even more bluntly. If you don't have an emergency fund in place, she told Grow, "I would not be investing on any level."
Prioritize paying down expensive debt, too, Wheeler says: "If you have credit card debt or other debt that's not temporary with high interest rates, you need to take care of that first."
If your debt is under control and you've built up a reasonable cash reserve, the last box you should check before buying investments is to make sure you've established a broadly diversified core portfolio that houses the vast majority of your invested assets.
"You want to start with the basic building blocks," says Todd Rosenbluth, director of ETF and mutual fund research at CFRA. "You can get exposure to a broad index like the S&P 500 by buying commission-free ETFs with expense ratios of 0.03%."
It's important to build this part of your portfolio with low-cost, passive funds, rather than those run by an active manager, Rosenbluth adds. "By putting so little money in the pockets of asset managers, you benefit most directly from long-term gains in the index," he says.
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If you have a diversified core portfolio in place and those other conditions are met, that's when you can think about using stimulus money to invest in ideas you're excited about. "Younger investors are more inclined to want to swing for the fences more," says Rosenbluth. "Time is on their side, and they don't want to own boring, slow-and-steady, blue-chip companies."
But that still doesn't mean it's smart to take a big swing on any one particular stock. If you're intrigued by a particular idea, consider spreading your risk among several companies by investing in an ETF that tracks relevant stocks. "You could pick a thematic ETF tied to something that resonates with you and that you understand, and that you think has long-term potential," Rosenbluth says.
Investors who are bullish on the future of online gaming, for instance, have several ETFs to choose from that track the performance of baskets of gaming stocks, including the VanEck Vectors Video Gaming and eSports ETF (ESPO), the Global X Video Games and eSports ETF (HERO), and the Wedbush ETFMG Video Game Tech ETF (GAMR). Similar options exist on all sorts of themes, from cannabis to blockchain to cloud computing.
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Owning such an investment allows you to make a bet on the future of an industry without pinning a significant portion of your future wealth on the fortunes of any one particular firm whose stock could move based on any number of company-specific factors that have nothing to do with the overall success of the industry.
"You may be inclined to buy a single company, but not all companies can be winners," Rosenbluth says. "ETFs give you the benefit of diversification."
They also give you the benefit of transparency, as ETFs must show what they hold in their portfolio on a daily basis. Scrutinize the holdings before you buy and don't just pick the one with the best recent performance. Of the gaming ETFs listed above, only the Wedbush offering has a significant stake in GameStop. That's driven enormous short-term performance, but prospective investors must weigh whether the strategy is sustainable over the long term.
It's easy to see the allure of using your stimulus money to buy cryptocurrency. The growth in bitcoin in particular has been explosive. A single bitcoin cost roughly $6,000 in March 2020. You'd have to pay about 10 times that to get your hands on one today.
But cryptocurrencies are speculative assets, notes Wheeler, ones whose prices are driven purely by investor demand and not by underlying fundamentals such as earnings or cash flows. As a result, he says, "We've seen tremendous swings in the value of this currency. And there's not a whole lot of good data to track the value of that kind of investment like you would a stock or bond."
That kind of unpredictability can be dangerous to investors, who could be tempted to sell low if there's a dramatic hit to the value of their portfolio. If you do buy cryptocurrency, be sure that it's not taking a commanding position among your holdings.
"Any crypto investment should be a very small portion of your portfolio," Wheeler says. "If you're putting all your eggs into this basket, you're essentially betting. That's not the way you create wealth down the line."
More from Grow:
- Suze Orman: Don’t buy stocks with your third stimulus check unless you’ve done this first
- $1,400 stimulus check calculator: Find out how much money you could get under the American Rescue Plan
- A ‘typical family of 4 might be bringing in $10,000’ in stimulus and tax refunds — here’s what to do with the money