Key insights
- The article suggests a beginner's approach to investing $10,000, primarily through ETFs. It recommends allocating $2,500 to VOO (Vanguard S&P 500 ETF) and $2,500 to VXUS (Vanguard Total International Stock Index Fund ETF) for diversified exposure. The remaining $5,000 is held in cash for potential active stock picking. The article highlights the long-term returns of the S&P 500 and the importance of diversification, but has limited impact on the broader market.
Over the very long term, the S&P 500 index has generated an average annualized total return of about 10%. More recently, the performance has been even better. The closely watched benchmark has produced a 283% total return in the last 10 years (as of March 24).
This is clear evidence that the stock market can be a wonderful way to build wealth. But it can certainly be intimidating for beginners. Here's how I'd start investing in the stock market today with $10,000.
There might be no better option for newbie investors than to buy low-cost exchange-traded funds (ETFs) to gain access to the stock market. This strategy is called passive investing. I'd allocate $5,000 to this.
There are lots of investment vehicles out there. They often provide different types of exposure. Of that $5,000, I'd invest half in the Vanguard S&P 500 Fund ETF (VOO 1.48%). This gives me instant access to the S&P 500, which is a group of large and profitable American companies.
The other $2,500 would go to the Vanguard Total International Stock Index Fund ETF (VXUS 1.92%). This ETF holds over 8,700 different stocks in businesses that are based outside the U.S., with a high concentration in Japan, the U.K., and Canada. Consequently, it provides adequate international exposure, which can be valuable to increase geographic diversification.
Both of these ETFs are extremely cheap. The Vanguard S&P 500 ETF carries an expense ratio of 0.03%, while the Vanguard Total International Stock ETF charges 0.05%. This means that investors won't have to worry about their returns being eaten up by the costs that are charged by Vanguard, the asset management firm.
This leaves $5,000 that still needs to be invested. With this part of the portfolio, I'd start out with all cash. My objective is to develop the ability to actively pick stocks. For many investors, this isn't of any interest. And that's totally fine. However, I have the time and what I believe to be the right skills to do this successfully.
Right off the bat, Alphabet catches my attention. It has many competitive advantages, is extremely profitable, and is a leader in artificial intelligence. Ferrari is also interesting, as it trades 38% off its peak. With its incredible brand strength, the luxury automaker benefits from pricing power. And this supports huge profits.
The ultimate goal is to own a basket of great stocks that I am able to purchase at compelling valuations. Of course, this will require tremendous patience to wait for the right opportunities.