How I would invest $20,000 today if I had to start from scratch

How I would invest $20,000 today if I had to start from scratch
How I would invest $20,000 today if I had to start from scratch

If there was a Mount Rushmore of investment advice, the words “make sure you have diversification” would surely be up there. It’s important to diversify the company’s size, sector, and geographic location because you don’t want your portfolio to be based on too few factors. Concentrated portfolios can have their upsides, but the downsides are usually much worse (and more likely to happen in the long run).

Ideally, you want a portfolio of at least 25 stocks, but instead of focusing on individual companies, I would invest in exchange-traded funds (ETFs), which allow you to invest in many companies at once . It also doesn’t take a lot of ETFs to get the job done.

If I had to start from scratch, I would invest $20,000 in these three ETFs.

When in doubt, look to an S&P 500 ETF

Very few stocks cover as much ground as a S&P500 ETFs. Tracking the 500 largest U.S. public companies, the S&P 500 is the most followed index in the stock market, and its performance is often used interchangeably with the performance of the stock market as a whole.

Aside from the expense ratio, there’s no tangible difference between the S&P 500 ETFs, but you can’t go wrong with the iShares Core S&P 500 ETF (IVV -0.21%)which is low-cost and brings together companies from 11 main sectors:

  • Communications Services (7.20%)
  • Consumer Discretionary (9.66%)
  • Basic consumption (7.30%)
  • Energy (5.26%)
  • Finance (11.58%)
  • Health (15.80%)
  • Industrials (8.70%)
  • Information Technology (25.52%)
  • Materials (2.77%)
  • Real Estate (2.72%)
  • Utilities (3.22%)

Since the S&P 500 only contains large-cap stocks, it’s not 100% diversified, but it does a good job of giving investors broad exposure to large companies in a single investment. And it helps that it contains most of the industry leaders and blue chip stocks. Therefore, I would let the iShares Core S&P 500 ETF be the base of my portfolio and invest $13,000 in it.

Don’t look past the little guys

Due to their size, small cap companies often have more room for growth than large cap companies, which bodes well for investors. However, it is also the small size that makes small cap stocks more prone to volatility and broader economic conditions. It’s a risk-reward trade-off.

You don’t want your entire portfolio to be made up of small-cap stocks because of the risk, but you should have some or you could be doing yourself a disservice and missing out on high growth potential. I would invest in a large and small cap ETF like the Vanguard Russell 2000 ETF (VTWO -0.26%) to reduce the risk.

The Russell 2000 is considered the primary benchmark for small cap stocks. It has a similar status covering the universe of small cap stocks that the S&P 500 has for large cap stocks.

The Vanguard Russell 2000 ETF is inexpensive with an expense ratio of 0.10% ($1 per $1,000 invested) and contains 1,970 stocks equally covering the 11 major sectors. You probably won’t get the hypergrowth you might get with individual small-cap companies, but you don’t take as much risk either.

DATA BY YCharts

I would invest $3,000 in the Vanguard Russell 2000 ETF.

Leave room for international actions

A truly well-balanced stock portfolio should include international companies. If you only invest in US companies, you are missing out on big companies and investments.

International markets are divided into two categories: developed and emerging. Developed markets generally have advanced economies, established industries, and a higher standard of living (the United States, United Kingdom, Japan, and Australia, for example). Emerging markets generally have less infrastructure, younger capital markets and less stable economies (Mexico, Brazil, Russia and India, for example). Like small cap stocks, emerging market companies are riskier but tend to have more upside as they grow with the market.

Researching individual businesses can already be time-consuming, but it’s an added layer when you have to consider things like the local economy and politics that could make or break a business. Instead of going through that, I would lean on the Vanguard Total International Stock ETF (VXUS -1.00%)which contains more than 7,900 companies in developed and emerging markets.

With a trailing 12-month dividend yield – the average dividend yield over the trailing 12 months – of 3.11%, the Vanguard Total International Stock ETF also offers higher dividend income than the iShares Core S&P 500 ETF (returning 1.69%) and Vanguard Russell 2000 ETF (returning 1.48%).

A good rule of thumb is to have 20% of your stock portfolio in international stocks, so I would invest $4,000 to close out the total $20,000 invested.

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