How would I invest $20,000 today if I had to start from scratch

If I gave you $20,000 to start a portfolio from scratch, how would you invest that money?

Investing is personal. Not surprisingly, we would all adopt different approaches and strategies. You’ll need to consider factors such as your personal financial situation, your investment time horizon, and your overall appetite for risk and volatility.

While I can’t tell you how you should invest $20,000 today, here’s how I would do it.

Image source: Getty Images.

Categorize your investment ideas

The sheer size of the stock market can be intimidating. This means that the first thing I would do is divide my investment ideas into broad categories.

I would focus on four main areas:

  1. Broad Market Funds
  2. Proven winners
  3. Sequential mixers
  4. Companies with a large selection

I’ll extrapolate from each of these categories, but keep in mind that as your own portfolio manager, you can focus on those areas that you think offer the most risk-adjusted potential.

Broad Market Funds

In the long term, S&P 500 has provided a return of over 10% (when dividends are reinvested). Although I believe beating the market is possible, I would allocate a significant portion of my portfolio to the benchmark through a low-cost, market-tracking exchange-traded fund (ETF). This creates a solid foundation for my investments and provides immediate diversification.

My personal favorite is Vanguard 500 Index Fund ETF (FLIGHT -0.66%)which tracks the S&P 500 and has an expense ratio of just 0.03%.

Expense ratios are the fees you pay to own a fund, and they’re one of the most important factors to consider when researching ETFs and mutual funds.

If I were investing today, I would allocate 20% of the amount to a low-cost S&P 500 ETF.

Proven winners

There are some companies that have been such consistent winners over the years that it’s almost impossible not to include them in a diverse basket of stocks.

Alphabet (GOOG -0.86%) (GOOGL -0.83%), Nvidia (NVDA -2.82%), An apple (AAPL -1.37%) and Microsoft (MSFT -1.07%) are all examples of such companies.

Since these firms have years and even decades of absolute dominance in their respective markets, it doesn’t take that much research when choosing them.

All of these companies have extremely strong balance sheets with very little debt. They also grow their top lines by at least 15% and boast a net profit margin of 20% or more.

Although long-term growth is somewhat limited by their huge market capitalizations, these companies offer the basis of healthy portfolio growth with little long-term risk.

I would allocate 7.5% of $20,000 to each of these four tech giants.

Sequential mixers

Some of my favorite stocks are boring companies that just keep groaning year after year. Look no further than Costco (PRICE -0.14%), McCormick (MKC -0.84%), Home Depot (HD -0.60%), Coke (Wh -0.60%)and Ball (BALL -1.58%).

All these “boring” companies have:

  • Leadership in their industries
  • Wide moats in the form of strong brand recognition
  • They produce products that their customers are likely to buy regardless of the economic environment.

But what I really like about these stocks is that they are blending machines. Each has delivered a compound annual growth rate (CAGR) of at least 10% over the long term.

Ticker

CAGR over the last 40 years

PRICE

16%

MKC

13%

HD

23%

Well

12%

BALL

12%

Data source: Calculations of aut.

While they may not be the most exciting businesses to own, you’ll be glad you bought them in a few decades when the magic of compounding growth kicks in.

I would allocate 6% of the lump sum to each of these high quality mixers.

Companies with a large selection

Finally, I would invest 20% of the $20,000 evenly in five high growth stocks: Free market (MELI -0.30%), Duolingo (DUO 0.98%), The Trade Bureau (TTD -1.40%), Axon Enterprises (AXON -1.32%)and KnowBe4 (KNBE -0.77%).

Investment firm NZS Capital defines optionality as “a large potential gain from a relatively small investment”.

In other words, by investing a small amount in companies with a wide potential for results, you can turn a small initial investment into huge profits.

All five of these growing companies are using technology to disrupt massive addressable markets.

Because these businesses are in hypergrowth mode, I’m less concerned about today’s profitability and more focused on cash flow. As such, I’ve chosen these five, in part, because they’re all positive for free cash flow.

Bankruptcy is a big risk for young companies, but that risk is greatly reduced when the company generates excess cash like any of these five.

While owning high-growth businesses can be really exciting, it’s important to limit your initial allocation because they carry significantly higher risk than the stocks mentioned earlier.

Average cost in dollars to hedge against a crash

If I invested $20,000 today, here’s how it would break down:

Ticker

Weight

An investment

FLIGHT

20%

4000 dollars

AAPL

7.5%

1500 dollars

NVDA

7.5%

1500 dollars

MSFT

7.5%

1500 dollars

GOOG

7.5%

1500 dollars

PRICE

6%

1200 dollars

MKC

6%

1200 dollars

HD

6%

1200 dollars

Well

6%

1200 dollars

BALL

6%

1200 dollars

MELLY

4%

800 dollars

DUO

4%

800 dollars

TTD

4%

800 dollars

AXON

4%

800 dollars

KNBE

4%

800 dollars

Total

100%

20,000 dollars

To mitigate the risk of another market crash, I would probably dollar cost average these positions, investing $5,000 each month for four months. That way, if the market crashes tomorrow, my cost basis for these positions will be much lower than if I had invested the entire amount at once.

Finally, while the allocation to VOO gives this portfolio a high degree of diversification, I would add additional positions over time with the goal of owning at least 25 individual stocks.

Your strategy may look different, but I believe the investments above provide a solid foundation for what we hope will be a market-beating portfolio over the long term.

Suzanne Frey, CEO of Alphabet, is a member of The Motley Fool’s board of directors. Mark Blank has positions in KnowBe4, Inc., MercadoLibre, Nvidia and The Trade Desk. The Motley Fool has positions in and recommends Alphabet (A Share), Alphabet (C Share), Apple, Axon Enterprise, Costco Wholesale, Home Depot, MercadoLibre, Microsoft, Nvidia, The Trade Desk and the Vanguard S&P 500 ETF. The Motley Fool recommends McCormick and recommends the following options: long January 2024 $47.50 calls on Coca-Cola, long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple . The Motley Fool has a disclosure policy.

Leave a Comment