Between Christmas spending and skimpier end-of-the-year bonuses, your pocketbook may already be tapped out. But if you were fortunate enough to find some dough in your stocking, now is the perfect time to kick-start a portfolio or add to your investments while the market is down. Here are five smart ways to invest your extra cash:
Boost your 401(k) contribution. A recent survey found that amid the economic turmoil, 63 percent of workers have given up on contributing to their retirement accounts, and an additional 35 percent have reduced their contributions. Although your account balance is shrinking, now is actually a good time to be boosting your 401(k) contributions, since you'll be scooping up stocks on sale. Try raising your automatic 401(k) paycheck deduction by just a percent or two, and make up for it by cutting down on discretionary expenses. No, you won't get much instant gratification, but consider it a future gift for yourself.
Set up an ETF portfolio. Exchange-traded funds, which look like index mutual funds but trade like stocks, offer some of the lowest fees around. Plus, they require no minimum investment: You can buy as little as one share. The best option, however, is to invest in a mix of funds that provides exposure to different types of U.S. and foreign stocks, as well as bonds. Like stocks, investors buy and sell ETFs through a brokerage, and transaction fees eat away at your returns. That's why discount brokerages are a good bet. Zecco, for example, offers 10 free trades per month for investors who maintain a balance of at least $2,500.
Put faith in an index. Listen to old-school cheapskates, such as the Bogleheads—disciples of Vanguard pioneer Jack Bogle—who preach the gospel of index funds. And with good reason: Indexing is an easy way to buy the entire market for pennies on the dollar. Because index funds don't require the services of a stock-picking manager, their fees are typically small. Take the Vanguard Total Stock Market Index Fund, which charges an annual fee of 0.15 percent and tracks more than 3,000 stocks of all sizes and in all sectors. Or the SPDR S&P 500 ETF, the annual expenses of which are a cut-rate 0.10 percent.
Bet on "Obama" stocks. Invest in market sectors that stand to benefit in an Obama presidency. His plan to spend $150 billion over 10 years on alternative energy bodes well for funds like PowerShares WilderHill Clean Energy Portfolio (symbol PBW) and Market Vectors Global Alternative Energy (GEX). Infrastructure companies could get a boost from a proposed stimulus package that would funnel government money flowing into bridges, roads, and rail lines (Bob Auer of the Auer Growth fund favors Valmont Industries, which makes everything from traffic lights to irrigation systems to components that connect wind farms to the power grid.) Among healthcare companies, generic drug makers, healthcare information technology firms, and companies that offer preventive healthcare services could also fare well.
Buy a CD. Stashing your money in a certificate of deposit is a good idea if you're saving for an expense that's a few months or years away. With CDs, you trade liquidity—or easy access to the money—for a fixed interest rate over a set period. Shop around for the best rates (right now, you can get 3.6 percent or more on everything from one- to five-year CDs). But remember, yields on longer-term CDs are more attractive because you risk the possibility that interest rates will rise during that time. CDs offer risk-free FDIC protection.