One of the biggest hurdles new investors need to overcome is the question of "where do I start?" And while there isn't any perfect way to start investing that applies to everyone, there are some general guidelines that could be helpful. So, for the sake of this article, I'll pretend that I'm starting my investment portfolio today and have $20,000 to put to work.
To be perfectly clear, this isn't personal financial advice, and what is an appropriate investment plan for me might not be appropriate for you. Having said that, if I were to start investing today and had $20,000 to deposit into a brokerage account, my general strategy would be:
- 50% into low-cost index funds
- 40% into rock-solid stocks
- 10% in cash
Let's unpack each of these.
Index funds (50%)
I own about 40 different stocks, so I clearly believe in the potential of investing in individual businesses. However, I also think that it's a good idea to form a solid backbone to your investment portfolio, and allocating some of your money to low-cost index funds is a great way to do it.
My personal favorite is the Vanguard S&P 500 ETF (VOO 1.18%), which simply tracks the performance of the S&P 500 benchmark index. Over the long term, the S&P 500 has produced total returns of about 10% annually, so index funds based on it can be a great way to build wealth while still allowing you to sleep at night.
Great starter stocks (40%)
While I have around 40 different stocks now, not all of them would make excellent "starter stocks" if I were just getting my portfolio together. You can add some more adventurous stocks later, but for new investors, the best candidates are time-tested businesses with excellent track records of success, and room to grow in the future.
Looking at my own portfolio, I can give a few examples of great stocks to get started with. Berkshire Hathaway (BRK.A 0.13%) (BRK.B 0.39%) is a conglomerate that's designed to be a wealth-building machine and has done exactly that for investors for nearly 60 years, since legendary investor Warren Buffett took over.
Amazon (AMZN 0.48%) is another great example, with a dominant lead in both e-commerce and cloud services, two industries with lots of growth potential in the years to come. Retail-focused real estate investment trust Realty Income (O 0.17%) is also a good beginner stock, as it's a business that is easy to understand and has a tremendous track record of market-beating performance.
Cash for a rainy day (10%)
Last but certainly not least, I'd leave 10% of my new portfolio in cash. It's an important thing for investors to think opportunistically, and leaving some cash on the sidelines helps build that mentality. Think of the current market situation. If you were fully invested a year ago and then looked at your portfolio today, the downturn would seem completely terrible. On the other hand, if you had a substantial sum of cash sitting around, you might see a market like this as full of bargains for a patient investor.
A few caveats
As I've said, this isn't intended to be personal financial advice, and there are some things you should take into consideration when starting to invest. For one thing, what are your investment goals? If you're investing for a near-term goal, such as to help your teenager pay for college in a few years, your ideal approach is probably much different than my long-term strategy.
The type of account you're using matters as well. For example, real estate investment trusts like Realty Income tend to pay dividends that are rather complicated from a taxation point of view, and therefore are best used in tax-advantaged retirement accounts. And you should certainly take your age and overall life situation into consideration. I'm in my 40s with young children, so my risk tolerance is likely to be much different than that of a single investor in their 20s, or a soon-to-be retired investor in their 60s.
The bottom line is that there is no one-size-fits-all way to start investing. This is simply what I would do if I were starting from scratch today with $20,000.
