How I’d Invest $20,000 Today If I Had To Start From Scratch — Including Real Estate

Creating a solid, well-diversified stock portfolio can be a lot easier than people think. It doesn’t require hours of research or investing in hundreds of individual companies—it just requires a few broad-based exchange-traded funds (ETFs). If I had $20,000 to invest from scratch, here’s how I’d do it.

The must-have staple

If there was one must-have investment that everyone should have in their portfolio, it’s an S&P 500 index fund. The S&P 500 is the most followed index on the stock market and tracks the largest 500 US public companies by market capitalization. There’s a reason Warren Buffett swears by the S&P 500: it works and historically returns about 10% annually over the long term.

There is very little difference between S&P 500 index funds, but the Vanguard S&P 500 ETF (FLIGHT 0.44%) is a good option due to its low cost with a 0.03% expense ratio. Containing large-cap and blue-chip stocks, this ETF is equipped to deliver respectable long-term returns.

I would invest the bulk of the $20,000 in this ETF and commit $10,000 to it.

Cover your bases with different market caps

Small-cap stocks (those with a market capitalization between $250 million and $2 billion) can be a double-edged sword. On the one hand, their size makes them more susceptible to volatility and more vulnerable during market downturns. Conversely, their smaller size means they have more room for hypergrowth.

Mid-cap stocks are the sweet spot between small-cap and large-cap stocks. They are just big enough to have more financial resources to weather bad storms, but small enough to still have room for lots of growth. You may not get the upside that you would with small-cap stocks, but you also don’t run as much risk. And you may not get the security of large-cap stocks, but there’s usually more upside.

The Vanguard Small-Cap ETF (VB 0.59%) and Vanguard Mid-Cap ETF (VO 0.70%) are both good options, and I would invest $2,000 in each.

Look outside the US

Every diversified equity portfolio should include international companies. You limit yourself as an investor if you only focus on US companies. There are many large companies worldwide, including many household names. International markets are generally divided into two categories, developed and emerging. But instead of focusing on them individually, you can look at a total international fund.

The iShares Core MSCI Total International Stock ETF (IXUS -0.07%) contains 4,309 stocks covering all major sectors and every continent (minus Antarctica). With a 0.07% expense ratio, it’s also relatively low cost. A good rule of thumb is to aim to have around 20% of your portfolio in international stocks. I will commit $4,000 to a total international ETF.

Don’t forget real estate

The logistical challenges that come with investing in physical real estate can turn many people off. This can be too much for some people, whether dealing with contractors, tenants or local regulations. Fortunately, investors can still get their share of the real estate pie without going through those challenges. All thanks to real estate investment trusts (REITs).

A REIT is an investment company that buys real estate to produce consistent income (usually by charging rent). One of the best things about REITs is that they are legally required to return at least 90% of their taxable income to shareholders in dividends.

If you want to kill two birds with one stone and gain diversification and exposure to real estate, look no further than the Vanguard Real Estate ETF (VNQ 1.27%). Within the ETF are 167 stocks and REITs covering many areas of real estate, including residential, hotel and resort, retail, office, industrial, and more. I will invest the remaining $2,000 here.

The breakdown of the investments

Instead of investing the full $20,000 at once, I will use dollar cost averaging, which involves making regular investments at set intervals. Using dollar cost averaging helps investors avoid trying to time the market because the investment schedule is already set. Whether share prices are up, down or stagnant, you make the investments.

You can split the investments into two $10,000 investments, four $5,000 investments, ten $2,000 investments, or however you see fit. The key is to stay consistent and stick to your schedule.

Stefon Walters has positions in Vanguard Mid-Cap ETF, Vanguard S&P 500 ETF and Vanguard Small-Cap ETF. The Motley Fool has positions in and recommends Vanguard Mid-Cap ETF, Vanguard Real Estate ETF, Vanguard S&P 500 ETF and Vanguard Small-Cap ETF. The Motley Fool has a disclosure policy.

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