How would I invest $ 5,000 today if I had to start from scratch

Life is funny. We often don’t know as much as we really need to know, while we really don’t need to know. In other words, the retrospective is really 20/20. This not only applies to investing, but it is especially true for investing.

With that in mind, here’s how I’d do things if I started from scratch with $ 5,000 starting money – and all the cumulative lessons from the mistakes I made since my first foray into the market almost three decades ago.

Half goes to a diversified index fund

This is advice that most investors have heard over and over again, which often leads to rolling eyes and moans. This is not only a cliché, but also the least interesting way to participate in the market. Nevertheless, your best first investment is really to get into a long-term position in an index fund as SPDR S&P 500 ETF Trust (Spy -2.04%) or Vanguard Total Stock Market ETF (VTSA.X).

Reality: Your first goal as an investor is not to beat the market; it just isn’t poorly performing market, believing that over time, market-based investments in index funds will yield good results. On average, the S&P 500 earns around 10% per year, even if it performs significantly worse or significantly better in most years. Time is of the essence.

But isn’t playing in defense – not losing, instead of playing for victory – the cowardly investor’s way of avoiding choosing stocks? Maybe, but know that the aggressive effort to beat the market by choosing individual stocks is a difficult business that often leads to lagging behind. Even professionals cannot do it consistently.

In its end-2021 report on Standard & Poor’s, it noted that nearly 80% of US stock funds are lower than the S&P 1500 Composite Index. For the last 10 years, 86% of these funds have lagged behind the index. Over the last 20 years, 90% of mutual funds have not kept pace with the broad market. So if the pros can’t even do it …

The moral of the story? Start simple and be simple.

Four smart actions to start with

Index funds are the place to start, but they don’t have to be where you end up. Once you have created this fundamental part of your portfolio, it is easier to hold on to individual stocks with confidence, even when they may lose positions. The key is to limit yourself to names with real durability.

Not that owning just four separate tickers is considered adequate diversification for the other half of this hypothetical portfolio, but these four stocks are a great start to that goal.

Alphabet (GOOGL -3.30%) (GOOG -3.47%) continues to be my favorite name for almost all investors. Although the years of highest growth are probably in the rearview mirror, this parent of Google and YouTube, as well as the owner of the Android operating system, is still crushing it. In just two quarters since 2010, its revenue has declined from the previous year, and one of those quarters is related to the arrival of COVID-19 in the United States. This is because it dominates the markets for web search, online video and mobile OS. While the world craves short video entertainment and relies on its mobile devices and needs a way to search the internet, Alphabet will have something to earn.

I’m also a fan ohf Verizon Communications (VZ -0.98%) for a similar reason: While consumers depend on the calling phones and wireless Internet connections they offer, Verizon will have many customers queuing up to pay for their mobile service each month.

There is little or no growth here, to be clear – Verizon is seen strictly as a revenue machine. And I would be very tempted not to reinvest its dividends in more Verizon shares, but instead to join my current reliable yield of 5.2% to fund purchases of other shares when they arise.

Bank of America (BAC -0.28%) performs two roles as a third individual stock selection for a new portfolio. One of these roles is making money. The current return of 2.6% is not exactly exciting, but it is something to reap now while holding the shares because of their potential to raise capital.

In this sense, the other role it plays is to offer you exposure to the highly cyclical but very costly financial sector. BofA tides with the best of them, but it is the best name among banks with a solid long history. With the exception of a complete social collapse, the world will always need a way to connect savers with borrowers and investors with corporations in need of capital.

Finally, I would like to complete the launch of this new $ 5,000 portfolio with part of a fairly young company called Upstart Holdings (UPST -7.55%). Think of it as the condescending, risk-seeking part of your portfolio that at least makes things fun and gives you something interesting to talk about at cocktail parties.

Simply put, Upstart does what traditional credit bureaus love TransUnion and Equifax it had to do a long time ago: it uses an artificial intelligence algorithm to determine an individual’s creditworthiness, instead of reducing people to a result based on erroneous indicators (which often paint the wrong picture anyway). Upstart’s approach results in 75% less loan defaults than the current loan approval regime of most banks, or in other words, gives the green light for 173% more loans without increasing the percentage of loan losses. Helping lenders make more (but lower risk) loans is the big reason why revenue is expected to rise to 48% this year.

Common sense is still king

These are just five offers, of course, and not yet a complete portfolio. The Motley Fool recommends owning a portfolio of at least 25 different stocks, and while allocating half of the hypothetical $ 5,000 to an index fund technically tests that standard, four names are still not enough to fully round out the individual half of your stock holdings. I would aim for at least 10 in total, but you can catch them in time.

Whatever the case, the only thing worth adding to this “start” discussion is to make it clear that a little common sense is very important, even if you’re not a veteran of investing. Namely, if something sounds too good to be true, it probably is is too good to be true. Guide clearly.

And while the constant coverage of stock market news seems like you always have to buy and sell something, it’s really a long-term game won by people who play it as such. This means having the willpower to leave your portfolio alone, even when things get a little awkward. This is because time – not the skill of picking stocks – is the best ally for investors, even if you don’t start with wealth.

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