Imagine you receive an envelope with 3 checks and a letter that says that you must invest all the money and try to get as much return as you can. The first check is 1k, the second 2 and the last of 5k (US$). The only thing is each investment need to be independent from each other.
This is a very difficult question to answer for the "generic person" - you cant assume they have any one skill or advantage and you also cant assume they have any certain risk profile or goal besides hopefully increasing their money by X dollars over Y years.
Its also difficult because firstly you have to look at all the possible investment opportunities and understand if your larger pools of 5k and potentially 2k buy you into any better opportunities. In other words you have to justify why you used the 5k for an investment instead of the 2k - without knowing specifics about the person its quite difficult.
With such a small amount of money comparatively to other investors in most environments Id say the person would be best off "investing in themselves" - apply all 3 buckets to learning 3 different potentially marketable skills that they hopefully can eventually leverage to create larger investment buckets. If the amounts were larger I might answer differently but with those amounts your best market is yourself.
Highest return? Nobody invests to get the lowest return. What makes it interesting is what your risk aversion is. If you need the highest guaranteed return, you're looking at something with a very low yield and/or a very long timeframe, like a US treasury savings bond. If you want the highest possible return, you're looking at something like a lottery ticket. Between these extremes are most of the interesting investments, but the returns are not astronomical or instantaneous.
I dispute this. I just sold my house, and will buy another one soon. I don't know the timeframe however, so there's no way I'd put the cash into the highest return vehicle because it will likely have a high volatility and I might need the cash at an inopportune time. As a result, I've dumped the cash in pretty much the lowest return vehicle, simply because I can take it back again whenever I need.
The timescale of the investment should definitely change the priorities.
I don't think we're actually in disagreement. The point I'm trying to make is that the risk and timescale are more important factors than the yield. You chose the highest yield investment you could find with the liquidity and stability you needed. The yield was not your primary concern--it almost never is.
If you manage to raise real returns by 1 percentage point above a high-interest savings account or an index fund, you're doing quite well. You've also earned a grand total of $80/year - how much money is that per hour worked?
Assuming you have no debt (or only ridiculously cheap debt), invest in yourself or save it for a rainy day; the latter allows you to not borrow for or insure small consumer stuff like computers or washing machines, which will be far more lucrative than "investing".
As moocow01 said, the answer will be generic for a generic question.
But few things you should consider before investing.
1. Try to invest in something you know inside out. In that way you increase odd of return.
2. What about your risk profile and current financial situation? If you have any credit card debt with 16% interest then you better pay off that. Very few investment in US will have annual return 16% or more.
3. If you are a risk averse person then you can invest the money into a index fund.
4. Or you can invest that money in yourself by learning something (a new skill, language or tool) you think it will propel your career forward.
1k - launch a online store or market an MVP
2k - poker
5k - stock trading
In some ways this is really the order of things in life. The investments that take the least money require the most work and time. The investments that take the most money are fast but involve more risk.
I tried my hand at each but I can't say one is better than the other for making money.
If you think buy and hold doesn't require work, then I'd say that isn't investing either. It's either gambling or praying.
The amount of work and experience to really understand a company, industry, and overall market is nothing compared to what it takes for a quick flip.
Let's be realistic, what are your odds of doubling or tripling your money by finding the right stock? Within a reasonable time frame of course.
That's the one thing I learned from stocks - there is no free lunch. The best long term hold stocks are either 1) expensive so that your return is minimal 2) unknown and take just as much work as a job 3) requires you to assume a high level of risk
This question really depends on your risk profile. If you were younger I'd suggest speculating with the 1k and 2k, and investing the 5k in your retirement so you can benefit from many years of compound interest. What're the constraints you're working under?
If "try and get as much return as you can" is the only input to the decision we are likely not investing but speculating and there is a difference. So if we are speculating here then I think I'd take those three envelopes to Vegas and split them between blackjack, craps and (hopefully) several hours of No-Limit poker. I could use a vacation anyway.