What to do with $1,000 today

By Mark Morelli - September 6, 2012 | Tickers: ABT, AMZN, AAPL, JNJ, PG | 0 Comments

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Recently some family members asked me how I would invest a lump sum of $1,000 today.

I told them more than $1,000 would be needed to get started (but it's better than nothing). The actual investment vehicle depends on various factors such as age, current financial status and investments owned, goals and comfort level. The sleeping factor is important. You don't want to be up all night worrying.

I said I would first make sure that a reasonable spending budget has been created with an appropriate amount allocated to savings and investments and that 9 to 12 months of living expenses are already socked away in a safe place like a bank account insured by the FDIC. Also, credit cards shouldn't be maxed out. In the words of rock musician Glenn Fry of the Eagles “don’t take it to the limit”. Don't pay those 19% interest rates.

If it was me making the investment I would verify my portfolio was spread out amongst different market sectors. "Don't put all your eggs in one basket and have different baskets".

Someone in their 20’s and 30’s should be more aggressive than someone in their 50's and 60's. There will be time to recover from any losses that may occur and over the long term (my definition of long is 15 to 20 years) stocks will probably provide the best return.

Buying reasonably priced growth stocks of companies with good management, lots of cash and famous brands would probably be the optimal choice for Generation X or Y. That approach has the best potential to continue to increase value over the long haul. Two stocks in this category are Amazon.com (NASDAQ: AMZN) and Apple (NASDAQ: AAPL). Would you buy a book on-line from someone else besides Amazon?

The chart below shows how well these stocks have performed over the last 10 years. Also plotted is their benchmark index, the NASDAQ Composite. Apple has increased by more than 9,000% and Amazon by over 1,500%. Note that the NASDAQ increased by only about 137%.

AAPL data by YCharts

There is nothing to indicate a downside risk for either stock. Apple plans to announce several new products this fall and earnings and cash should keep growing. Amazon just announced several new products and will keep innovating and growing as well.

A baby boomer approaching retirement may not want to be as aggressive but at the same time still needs more upside than what a bank account, CD or a Treasury bond can provide. An investment in an index fund that buys the market is one way to go. Based upon historical averages this approach has returned about 9 or 10% per year over the long term.

However, choosing a solid dividend-paying stock, say one from the Dividend Aristocrats, which are companies that have been increasing payments for 25 consecutive years or more, would have beaten the average return. For example, an investment of $1,000 in Johnson and Johnson (NYSE: JNJ) in August 1997 would have returned 231% (> 15% per year). It would be worth $3,311 today. Johnson and Johnson has increased its payout every year since 1956. The same $1,000 invested in an index fund is only worth $1,556 today.

Another Dividend Aristocrat to consider is Procter and Gamble (NYSE: PG). The table below shows how an initial $1,000 investment in 1997 would have turned out for the maker of Tide and Pampers.

A riskier route for the boomer would have been the growth path instead of the dividend route. However, if the purchases were made at the height of the dot-com bubble or right before the 2008 financial collapse and if the money would have been needed shortly thereafter, the investment performance wouldn't have turned out so well as if the stocks were held for a longer period of time. For example, Apple shares lost half of their value between Aug. 31, 2008 and Nov. 30, 2008.

Those already in retirement may need to supplement Social Security and pension income. Because interest rates are so low a simple bank account will not cut the mustard. They can also look at buying a dividend stock. One to consider is Abbott Laboratories (NYSE: ABT). Abbott has plenty of cash so it should be able to keep paying a dividend. In fact it has increased the payout by an average of 12.7% per year since 1983. The current yield is about 3.1% which would provide $31 for every $1,000 invested. Should they consider a more risky stock? Probably not, unless they have a longer time horizon.

So I hope that I provided some good advice to my family members and I hope that they have the same level of success I've had using a simple approach to investing. Sometimes it's good to spread the wealth around.

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