It can be fun to play what-if games. For example, what if you suddenly had $50,000: What would you do with it? Many people might start shopping for a fancy new car or look into finishing their basement, among lots of other possibilities.
One terrific thing to do with $50,000, especially if you haven't saved much for your future, would be to invest it for your retirement. Let's assume that's the case. Here's how I might go about investing that money.
Starting from scratch
If I'm starting from scratch, I'll assume that I don't know very much about investing other than the fact that lots of people seem to make a lot of money investing in stocks. Since I don't want to lose this significant chunk of money, I'll be trying to not make crucial errors with it. I'll try to read up on investing, in order to learn what to do and what not to do.
There's a good chance that I'll do at least some of my learning at Fool.com, which has long recommended investing via low-fee, broad-market index funds. These are great for beginning investors, and even seasoned ones can do well by putting much or all of their long-term money in them.
Setting the stage
That "long term" part is right: I should only invest money in the stock market that I won't need for at least five years (if not 10), since the market can be volatile. For the short term, money might be plunked into certificates of deposit (CDs), money market accounts, bonds, or other less-volatile investments.
Here's another consideration: If I have any debt with high interest rates, such as with credit cards, I'd do well to pay that off pronto -- such debt can make it hard to ever get ahead financially. If you're earning an annual average of, say, 8% to 15% in stocks but are paying 20% to 25% on your debt, you can lose ground instead of gaining it. So some of that $50,000 (or all, if need be) should pay off high-interest debt.
Also, if I don't yet have an emergency fund, with enough to fully support me for at least three to six months, then I should apply some or all of my $50,000 to such a fund. Yes, it might be more exciting to put it all into stocks, but if you don't have your ducks in a row, with credit card debt paid off and an emergency fund ready, your dreams of stock market riches could crash.
Investing that $50,000
So let's say I have a ready emergency fund and no high-interest debt. I'm ready to invest! I think that as such a new investor, I'd begin with one or more index funds. Money I invest in such funds will be spread out across the host of stocks held in the index that the fund tracks. So an S&P 500 index fund will spread investor dollars across the 500 stocks in the S&P.
Good index funds (and there are many of them) charge very little in fees, which means I'll earn nearly the same return as the overall index -- and over long periods, the stock market has averaged returns close to 10% annually.
Here are three solid exchange-traded funds (ETFs), which are essentially funds that trade like stocks. Each is a low-cost index fund.
- SPDR S&P 500 ETF (SPY 0.62%)
- Vanguard Total Stock Market ETF (VTI 0.56%)
- Vanguard Total World Stock ETF (VT 0.75%)
Respectively, these investments can have you instantly invested in roughly 80% of the U.S. stock market, the entire U.S. stock market, or just about all of the world's stock market.
What to expect
Now, on to the most exciting part of this what-if exercise! Let's see what I can expect from my investment. Here's how it would look if I averaged 8% growth annually:
Over This Period, at 8% Annually... | ...$50,000 Grows to |
---|---|
5 years |
$73,466 |
10 years |
$107,946 |
20 years |
$233,048 |
30 years |
$503,133 |
40 years |
$1.1 million |
Wow! I can amass $1 million if I have 40 years. Which I don't. So what else might I do? Well, it would be smart to just keep adding to this investment account every year. Here's how much I might amass if I add either $10,000 annually or $20,000 annually:
Over This Period, at 8% Annually... | ...$50,000 Plus $10,000 a Year Becomes | ...$50,000 Plus $20,000 a Year Becomes |
---|---|---|
5 years |
$136,826 |
$200,185 |
10 years |
$264,401 |
$420,856 |
20 years |
$727,277 |
$1.2 million |
30 years |
$1.7 million |
$3 million |
40 years |
$3.9 million |
$6.7 million |
Next steps
The numbers above are pretty impressive, showing just how far I might go starting with $50,000 and sticking solely with index funds. But what if I want to do better -- and faster? I might put some or much of my money into carefully chosen individual stocks, particularly growth stocks.
Doing so might have me averaging annual growth of 15% or possibly 20% or more over long periods. But it's far from guaranteed. Many growth stocks will be long-term amazing performers, but others will flame out. Some will just be so overvalued when you buy them that they won't grow as much as you had hoped over the long run.
To succeed in growth-stock investing, I would need to do a lot of reading and learning. It might be best to stick mostly to index funds and just put some of my money toward growth, if any. The Motley Fool's investing philosophy would have me buy 25 or more stocks, aiming to hold them for at least five years. That should give even overvalued stocks a reasonable chance to grow.
So there you have it: how I would invest if I had $50,000 and were starting from scratch. Take some time to read more and see how you might invest such a sum.