In investing, sometimes simpler is better. Investing doesn't have to be complicated, nor should it be. It doesn't take hours of research or technical analysis to put together a solid portfolio; oftentimes, a handful of well-diversified funds will do the trick. Here are three investments I would lean on if I had to invest $20,000 from scratch today.
When in doubt, head for the S&P 500
The S&P 500 is an index that tracks the largest 500 public U.S. companies by market cap. It's the most followed index and is often used to gauge how the overall stock market is performing. The S&P 500 is a good investment because it gives investors almost instant diversification, access to blue chip stocks, and less risk than investing in an individual company. It's a three-for-one you can't go wrong with.
I would put most of the $20,000 toward the S&P 500, investing $12,000 in the Vanguard S&P 500 ETF (VOO 1.34%). The Vanguard S&P 500 ETF is one of the cheapest ETFs available (0.03% expense ratio) and has returned over 13.5% since its inception in September 2010. Past results don't guarantee future performance, but you can be sure its returns will closely track the overall market over the long term.
NYSEMKT: VOO
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There's a reason Warren Buffett is a huge proponent of the S&P 500: It's effective. He even told CNBC that buying a low-cost S&P 500 fund "makes the most sense practically all of the time." Countless people have become millionaires by simply investing in the S&P 500 over time. When in doubt, let it lead the way.
Don't overlook smaller companies
High-risk, high-reward applies to different types of investments (stocks vs. bonds, for example), but it also applies within stocks. Larger companies are less prone to volatility and market downturns because they tend to have more resources at their disposal. Smaller companies are generally riskier and more susceptible to broader economic conditions, but their size means there's more room for growth -- and returns for investors.
The Russell 2000 tracks the smallest 2000 companies in the Russell 3000 and is widely considered the primary benchmark for small-cap stocks. What the S&P 500 is for large-cap stocks, the Russell 2000 is for small-cap stocks. It's diversified and covers every sector imaginable. If I were starting from scratch, I would invest $3,000 into the Vanguard Russell 2000 ETF (VTWO 2.23%) because of its comparably low expense ratio (0.10%) than other Russell 2000 ETFs.
NASDAQ: VTWO
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Like all major indexes, it's been a rough 2022 for the Russell 2000, but that was to be expected. Small-cap stocks usually take more of a hit during bear markets, but they often outperform large-cap stocks in the early stages of a bull market. You don't want the bulk of your portfolio in small-cap stocks, but you should have some exposure.
Look outside the U.S.
One of the key pillars of a good investment portfolio is diversification. Part of having diversification includes investing in companies with different market caps, different industries, different growth potential, and different locations globally. If you only invest in U.S. companies, you're limiting yourself and missing out on quality investments that could provide good returns.
International markets are generally divided into two categories: developed and emerging. Developed markets typically have more advanced economies, better infrastructure, established industries, and higher living standards. Conversely, emerging markets typically have lower incomes, younger capital markets, and less-stable economies.
Researching individual U.S. companies can already be time-consuming for most people, and adding in the international element (local economy, political climate, etc.) doesn't make it any easier. That's why investors should consider investing in a total international ETF, which can double the diversification by exposing them to developed and emerging markets.
Take the Vanguard Total International Stock ETF (VXUS 0.94%), for example, which contains 7,985 companies spanning the following regions:
- Europe: 39.6%
- Pacific: 26.7%
- Emerging markets: 25%
- North America: 8.1%
- Middle East: 0.6%
This is where I'd invest the remaining $5,000.
