If you find yourself with a lump sum of cash and consider investing it, pat yourself on the back because you're on the right track. Making good investing decisions in the short term can oftentimes pay off tenfold in the long term, so it's important that you're intentional with your investments. Here's how I'd invest $20,000 if I had to start from scratch.
Let the S&P 500 lead the way
A good portion of the $20,000 would undoubtedly go into an S&P 500 index fund. Consisting of the 500 largest American companies, an S&P 500 fund is home to some top large-cap stocks (including blue-chip) and is what I consider a staple in any investment portfolio. An S&P 500 fund would also achieve one of the key pillars of investing: diversification. A fund like the iShares Core S&P 500 ETF (IVV -0.15%), for example, spans the following industries:
- Information Technology: 27.19%.
- Healthcare: 14.74%.
- Consumer Discretionary: 10.88%.
- Financials: 10.77%.
- Communication: 9.03%.
- Industrials: 7.67%.
- Consumer Staples: 6.82%.
- Energy: 4.21%.
- Utilities: 2.95%.
- Real Estate: 2.90%.
- Materials: 2.60%.
You never want your investments to be too reliant on a particular company or industry, and an S&P 500 fund offers both types of diversification.
Look outside the U.S.
You're limiting yourself if you only look to invest in U.S. companies. Plenty of great companies and household names operate outside the 50 states, and adding them to your portfolio can be beneficial. Researching and investing in individual companies -- especially spanning different regions -- isn't easy, though, and could mean considering different factors you may not prioritize with American companies (like local politics).
Instead of spending the time doing that, I'd invest in an international index fund that includes companies in both developed and emerging markets. An index fund like the Vanguard Total International Stock ETF (VXUS 0.05%) consists of more than 7,800 companies in the following markets:
- Europe: 39.6%.
- Pacific: 26.7%.
- Emerging markets: 25.2%.
- North America: 7.9%.
- Middle East: 0.5%.
Give yourself a chance for high growth
Due to the size of large-cap companies, many have little to no room for hypergrowth. That's where small-cap and mid-cap stocks can come in handy. Large-cap stocks are generally more stable, but there's usually more upside for smaller-cap stocks because of their growth potential. With this growth potential comes higher risks, however, because smaller companies are more susceptible to high volatility. Still, you always want to expose yourself to small-cap and mid-cap stocks -- although not much because of the risks -- to take advantage of the upside.
The Vanguard Small-Cap ETF (VB 0.27%) contains over 1,540 companies, and the Vanguard Mid-Cap ETF (VO 0.20%) contains over 370 companies, allowing you to spread out some risks among an already riskier category of stocks. They would be my go-to for small-cap and mid-cap funds.
Divide up the investments
Instead of investing the whole $20,000 at once, I would use dollar-cost averaging to break up the investments. Dollar-cost averaging involves investing a set amount at set times, and it's one of the best ways to remove some of the emotions from investing because you invest regardless of what's going on in the stock market. How often you set your investments isn't as important as just making sure you're consistent and stick to it.
In this scenario, I would break the $20,000 into 10 $2,000 weekly investments:
- Large-cap: 60% ($1,200).
- International: 20% ($400).
- Mid-cap: 10% ($200).
- Small-cap: 10% ($200).
With time on your side, that $20,000 can easily turn into six figures down the road.