How to Invest $10,000. Simple Starter Portfolios


Money magazine has a great article in their Jan/Feb edition called the Money  50 which lists its recommended top 50 mutual funds and Exchange Traded Funds (ETFs).  The nice thing about the article is that it provides some great, low-cost funds and breaks them down by category into things like large stocks, emerging markets, and so on.  The writers also provide a guide on how to use the Money 50 to build a portfolio.

One of the first suggestions is a very simply portfolio consisting of just three funds/ETFs.  These are:

Vanguard Total Bond Market Index – Bonds

Schwab Total Stock Market Index – Stocks

and Vanguard Total International Stock Market Index – International Stocks.

An option, if you just wanted to stay with Vanguard, would be to use their Vanguard Total Stock Market Index as well.  You could also invest through a brokerage account in the ETFs for these funds, which would have lower costs each year but cost some money in commissions when you purchased them.

With just these three funds, one could build a well diversified portfolio just by allocating money to these three funds appropriate for one’s age.  For example, if you were 20 years old, you’d need little exposure to bonds, so you might set up a portfolio that was:

50% Total Stock Market

40% International

10% Total Bond Market

To perhaps improve performance a little bit, you could also mix in some of the other funds to give yourself exposure to real estate (the Vanguard REIT Fund) or small-cap stocks (the Vanguard Small Cap fund or the iShares Core S&P Small-Cap ETF).

So what if you had $10,000 to invest?  How could you use this information to build a portfolio?  Here are some different, no fuss portfolios you could build with this information and $10,000:

Portfolio 1:  The Simple High Growth, Low Tax Portfolio

$6,000 Vanguard Total Stock Market

$4,000 Vanguard Total International Stock

This portfolio might be appropriate for someone in their 20’s or 30’s with a strong stomach who won’t need access for the money for a long time.  This portfolio is all stocks, which is what you want for low levels of interest and dividend payments – and therefore low taxes until you sell – and the highest rate of return over long periods of time.  Including some international stocks will help cushion the blow when things are bad in the US and will also help if the currency gets inflated.  This portfolio, however, could be a wild ride at times, with gains or losses in the range of 30-50% some years.  Remember also that the world economies are connected, so bad times in the US won’t necessarily be offset by good times in France.  This portfolio is therefore only for those who have the conviction to stay the course even when things get bad, or at least the wisdom to stop looking at their portfolio balances for a while when they are declining.

Portfolio 2:  The Simple Growth and Income Portfolio

$4,000 Vanguard Total Stock Market

$2,000 Vanguard Total International Stock

$4,000 Vanguard Total Bond

This portfolio is suitable for those who are getting closer to retirement and can’t take a 40% market drop.  This wouldn’t be for someone who is 64 and ready to check out tomorrow, but it would be appropriate for someone 50-60, maybe.  It could also be for someone younger who just doesn’t want the gut-wrenching changes in value and is therefore willing to give up some growth for better sleep at night.  (A younger person should reduce the percentage of bonds, however, perhaps to 20-30% when 30 years old since you’d be giving up a lot of growth by being too conservative.)  The portfolio still spreads stock market risk by including international stocks, but also includes a good portion of bonds which will pay income and help smooth out the dips in the market.  Normally this would be a good portfolio, but unfortunately bonds are so overpriced right now due to the actions of the Federal Reserve trying to keep down interest rates, a substitution for bonds is needed.  Instead, see the next portfolio and look to change to this portfolio when interest rates rise back to normal levels.

Portfolio 3:  The Alternate Growth and Income Portfolio

$3,000 Vanguard Total Stock Market

$2,000 Vanguard Total International Stock

$1,000 Powershares International Dividend Achievers’ ETF

$3,000 Vanguard REIT Index

$1,000 SPDR S&P Dividend ETF

Here, to make up for the inability to buy US bonds, we’ve added a couple of dividend-focused funds and an REIT (real estate) fund.  These funds have the ability to gain both appreciation and generate current income, although not as much as bonds have traditionally been able to do.  These funds may be hit a little bit as well if interest rates rise, causing the price of fixed-income assets to fall, but it has a little more diversification than just bonds.  Note that we had to back off on the stocks a little bit since the minimum investment for the REIT fund is $3,000.  Still, there is more stock exposure in the dividend funds, and there is some capital appreciation potential in the REIT fund.

Portfolio 4:  The Maximum Growth Portfolio

$3,000 Schwab S&P 500 Index

$3,000 Vanguard Total International Stock

$3,000 Vanguard Small-Cap

$1,000 Vanguard Small Cap Value ETF

This portfolio is invested in all equities and leans towards the small-cap side, which is where you want your money to be for long-term growth.  (The small stocks have more room to grow than the large ones).  Adding a little bit of value investing will help balance the portfolio a little bit when it becomes a stock picker’s market.  The small investment there ($1,000) is due to the limited amount of funds.  Saving up another thousand and investing $2,000 there would cut the percentage you’d give up in brokerage commissions.  Note that the all equities and small-cap leaning nature of this portfolio could mean a wild ride, so this portfolio isn’t for the faint of heart.

Portfolio 5:  The Steady Growth and Income Portfolio

$4,000 Vanguard Total Stock Market

$2,000 Vanguard Total International Stock

$1,000 Powershares International Dividend Achievers’ ETF

$2,000 SPDR S&P Dividend ETF

This portfolio is for someone in their thirties or forties who wants to reduce volatility a little but still get good growth.  This portfolio is 70% growth assets and 30% income assets.  The dividend ETFs could be replaced by the Total Bond Index if interest rates were to return to more normal levels and the risk of holding bonds were not so great.  The ratio of income to growth could be decreased when starting and then increased as one got older, perhaps holding a percentage of bonds/income assets equal to your age minus 10%.  For example, this portfolio is 30% bonds, and therefore might be appropriate for some one who is 40 years old (40% – 10%).

Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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