Question: I have $20,000 in extra cash on hand. How should I invest it?
Answer: There’s not a one-size-fits-all answer to the question because every investor is going to have a slightly different situation that depends on their age, sources of income and existing investments, among other factors.
Perhaps you inherited a little money or got a monster tax refund. Or maybe you’re just a diligent saver and have managed to sock away an extra $20,000 above and beyond what you might need for an emergency rainy-day fund.
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What’s the best way to get that money working for you?
Let’s go through a few scenarios to see what might make the most sense for you on investing that $20,000.
Do this if you’re starting from zero
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If you have no existing brokerage account, company 401(k) plan or other investment account, you’re a blank slate.
In this case, the easiest way to get your feet wet would be to open a brokerage account at Charles Schwab, Fidelity or any other reputable broker and put together a simple ETF portfolio. (Here’s a handy guide to the best online brokers and trading platforms.)
You can kickstart a good starter portfolio with just two exchange-traded funds (ETFs) – the Vanguard Total Stock Market ETF (VTI) and the Vanguard Total Bond Market ETF (BND).
VTI gives you exposure to virtually the entire U.S. stock market, and BND does the same for the bond market.
Both are two of the best ETFs to buy for their respective asset classes, and both are essentially free to own with expense ratios of just 0.03%. That means that for every $10,000 invested, you’re paying $3 in fees each year.
If you consider yourself moderately conservative, something along the lines of 60% invested in VTI and 40% BND is a solid way to go. (This is what’s referred to as a 60/40 portfolio.)
If you’re young, have a time horizon of 20 years or longer, or are generally comfortable taking on risk, you could invest more in VTI and less in BND, building perhaps a 70/30 or 80/20 portfolio.
Or if you were more conservative, you could increase your percentage in BND.
Just for grins, let’s see what that 60/40 portfolio might look like in practice.
Putting 60% of your $20,000 into VTI works out to be $12,000. At last check, VTI was trading around $260 a share, so you would have enough cash to buy 46 shares. That leaves you with $8,000 to invest in BND. The bond ETF was last seen trading around $73, so you could buy 109 shares.
Once per year or so, check your portfolio to see if it has drifted away from your 60/40 target and then buy or sell a few shares of VTI and BND to get back to where you’d like to be.
It’s a simple portfolio, sure. But it will give you a good start to building your wealth through investing.
Do this if you already have ample retirement savings or other investments
(Image credit: Getty Images)
Now let’s say you’re not starting from scratch. Perhaps you already have a company 401(k) plan in place that is well funded and invested appropriately for someone your age.
What now?
Well, the 60/40 portfolio of VTI and BND is still a perfectly viable option. But if you are already well on your way to building a proper retirement nest egg, you can also afford to get a little more creative.
You can try your luck with individual stocks or even something more risky, such as bitcoin or other cryptocurrencies. You could also invest in gold or consider using the $20,000 as a down payment on a rental house.
Perhaps the best advice here is to buy something you don’t already own. Or, to use financial planning lingo: diversify.
For example, if you already have $100,000 built up in your 401(k) plan, putting $5,000 or more into a gold ETF such as the SPDR Gold MiniShares (GLDM) will give you exposure to something you don’t already have in your retirement account.
The same would be true of a modest allocation of $1,000 or so into a bitcoin ETF such as the iShares Bitcoin Trust (IBIT).
It can also be exciting to try your luck as a stock picker or to take the legendary money manager Peter Lynch’s advice to invest in what you know.
That coffee shop down the street that you frequent might be the next Starbucks (SBUX), or that brand of shoes that your nephew raves about could be the next Nike (NKE).
If you do want to start investing in individual stocks, just remember to keep your position sizes moderate. A decent rule of thumb would be not to put more than around 5% of the account in any single stock.