How to invest $20,000 largely depends on your age, goals and personal finances. Based on past performance and the current economic environment, we’ve listed eight strong investment options to consider.
Stocks are considered to offer the greatest potential for growth over the long term. Historically, the stock market has delivered annual returns of about 10%. In the last two and a half decades, technology stocks like Google (GOOGL), Amazon (AMZN) or Microsoft (MSFT), in particular, have offered some of the best returns of any financial asset. However, with these high returns comes greater volatility, making these stocks better for long-term investors or investors with a high-risk tolerance.
Investors with a lower risk appetite may instead favor dividend stocks like Coca-Cola (KO), General Mills (GIS) and Procter & Gamble (PG). Stocks that pay dividends tend to be less volatile and typically provide stability to a portfolio. Dividend investors give up the outperformance that comes with many high-quality growth stocks for the reliable income stream of dividends.
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While individual stock picking requires time and research, stocks are highly-liquid assets. Since there’s almost always a buyer, it’s usually quick to cash out your shares if and when you’re ready to sell. Most brokerages don’t charge stock trading fees, and holding shares gives you voting rights in the company.
Stock trading is more accessible than ever before. And with the advent of fractional shares, you don’t have to save up enough to buy whole shares of blue chip stocks like Tesla (TSLA) or Walmart (WMT). Many brokers let you buy shares for as little as $1.
Finder data suggests that men aged 25-34 are most likely to be researching this topic.
| Response | Male (%) | Female (%) |
|---|---|---|
| 65+ | 4.34% | 2.98% |
| 55-64 | 7.24% | 3.86% |
| 45-54 | 12.15% | 6.84% |
| 35-44 | 14.80% | 8.37% |
| 25-34 | 16.25% | 7.80% |
| 18-24 | 9.09% | 6.28% |
If you can wait until retirement to access your funds, consider investing your $20,000 through a tax-advantaged investment account like a 401(k) or an individual retirement account (IRA). These accounts are designed to provide individuals with tax benefits for saving for retirement, and their value shouldn’t be ignored.
The two main types of 401(k)s and IRAs are the traditional and Roth versions. Traditional provides immediate tax benefits — contributions to a traditional 401(k) automatically lower your taxable income for the year, while traditional IRA contributions are tax-deductible come tax season. Meanwhile, there’s no tax deduction, but Roth accounts offer tax-free withdrawals in retirement. And you can withdraw your Roth contributions at any time without taxes or penalties since you’ve already paid taxes on this money.
A majority of 401(k) plans include employer contributions, which amplifies these accounts’ value even more. If this applies to you, you may want to invest at least enough in the 401(k) to earn the full match — it’s free money you should prioritize. After that, if you want more flexibility in terms of investment options, turn your focus to maxing out an IRA. If you don’t already have an account, the best Roth IRAs feature plentiful tools, features and educational resources, have the most investment options and charge the fewest fees.
The 2023 IRA contribution limit is $6,500, while 401(k) contributions max out at $22,500.
Pro tip: Robinhood offers 1% in matching contributions to a Robinhood IRA. With a 2023 contribution limit of $6,500, that’s $65 in free money.
For risk-averse investors or those with a short time horizon — like those nearing retirement — low-risk securities such as Treasuries, money market funds and bank deposit products provide an unmatched level of safety and reliability compared to riskier investments.
For instance, US Treasuries are backed by the full faith and credit of the US government, so there’s little chance of default. And aside from the guaranteed fixed rate of return on certificates of deposit (CDs), these bank products are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per FDIC-insured bank, in the event the bank goes under.
Conservative investments like these aren’t designed to produce large returns but rather are meant to preserve the purchasing power of one’s capital with low risk.
If you want exposure to stocks but individual stock picking isn’t for you, an exchange-traded fund (ETF) might be an option. When you buy an ETF, you gain exposure to a basket of stocks, bonds, futures or whatever asset is of particular focus for that ETF. As a type of pooled investment, you’re a part owner of the fund and can trade it during market hours just as you would a stock. While you don’t have actual ownership in any of the stocks, ETFs provide instant diversification by investing in multiple stocks through a single fund, which can potentially lower your risk exposure.
ETFs come in many types, but index-based ETFs — ETFs that match the moves of indexes such as the S&P 500 or Nasdaq Composite — provide a simple way to invest without requiring much market knowledge. Examples of popular index ETFs include the SPDR S&P 500 Trust ETF (SPY), which tracks the performance of the S&P 500, and Invesco (QQQ). This ETF tracks the performance of the component stocks of the Nasdaq-100, an index of the largest 100 non-financial stocks listed on the Nasdaq.
Meanwhile, sector-based ETFs give you exposure to specific market sectors. For example, the Energy Select Sector SPDR (XLE) tracks the energy sector of the S&P 500, while the Utilities Select Sector SPDR (XLU) offers you exposure to the S&P 500’s various utility stocks.
Most people — including professionals — do not have a good record when it comes to stock picking. In 2021, about 85% of active US stock funds underperformed the S&P 500. ETFs are a solid option for most individual investors. Even Warren Buffett owns two.
A robo-advisor is an automated financial advisor that manages your portfolio via an algorithm. Based on your responses to a handful of questions about your time horizon and risk tolerance, the algorithm trades and rebalances your portfolio on your behalf.
Many robo-advisors invest solely in ETFs, which helps keep management fees low. At about 0.25% annually, management fees for robo-advisors are a fraction of what a human financial advisor charges. Some robo-advisors also require a minimum deposit of between $100 and $500. Some of the best robo-advisors, like SoFi’s Automated Investing, have no minimum investment requirement and no management fees.
Alternative investments are those outside traditional stocks, bonds, ETFs or mutual funds. These include, but are not limited to:
A number of alternative investing platforms exist today that let everyday investors expand and diversify their portfolios with assets beyond conventional investments. Plus, many alternative investments aren’t correlated with the stock market, which means they could potentially be used as a hedge against poor market performance.
While some alternatives offer the potential for outsized returns, these assets tend to be risky investments. Alternatives can be volatile and illiquid. For example, it’s not uncommon for the price of NFTs to drop over 50% within one quarter. You might also struggle to find a buyer for the digital art or other alternative assets you’re looking to sell.
A real estate investment trust (REIT) is a company that owns and operates income-producing real estate. REITs let you invest in commercial property, including office buildings, shopping malls, hotels, resorts and apartment complexes, all without the burden of having to physically own and manage the property.
A REIT can be either private or publicly traded on major stock exchanges. Examples of publicly-traded REITs include Prologis (PLD) and Simon Property Group (SPG). To purchase private REITs, you either need to be an accredited investor — an investor of a certain net worth or income or certain investment professionals — or use a real estate investing platform like Fundrise.
One downside to REITs is that taxes on their dividends can be higher than the taxes you’d pay on dividends from certain stocks or ETFs. Many REITs are taxed as ordinary income, which can be as high as 37%, depending on your income bracket.
Cryptocurrencies — or “crypto” for short — are digital assets that exist on a blockchain and can be used for peer-to-peer transactions. Unlike just about any other asset class, crypto trades 24 hours a day, 365 days per year.
Historically, the crypto market has had big boom and bust cycles — all crypto assets can be highly volatile. Value investors may aim to buy into crypto during the lows of the busts and not the highs of the booms. If you are new to investing in crypto, you may want to stick to investing in a blue-chip crypto asset like Bitcoin (BTC), which has held more of its value over longer time horizons compared to most other crypto assets.
To invest in this asset class, it’s important to find the best crypto exchange for your needs and to learn how to use a non-custodial wallet. A non-custodial wallet lets you hold the private keys to your digital assets, which keeps your crypto assets secure.
Here’s a look at how your $20,000 might grow in three common investment classes over various time frames.
| Time-period | High-yield savings account | Bonds | Stocks |
|---|---|---|---|
| 1 year | $20,878 | $21,066 | $22,000 |
| 5 years | $24,792.74 | $25,929.28 | $32,210.20 |
| 10 years | $30,733.99 | $33,616.37 | $51,874.85 |
| 15 years | $38,098.99 | $43,582.41 | $83,544.96 |
| 20 years | $47,228.91 | $56,503.02 | $134,550 |
| 25 years | $58,546.70 | $73,254.13 | $216,694.12 |
| 30 years | $72,576.65 | $94,971.33 | $348,988.05 |
For this table, we assumed:
Pay off your debt. Depending on the interest rate you’re paying on your debt, you may be paying more on your debt than you can earn investing. For example, if the interest rate on your student loans is 7% and you’re only earning 4% in a high-interest savings account, you may be better off paying down your debt than keeping your money in the high-interest savings account.
Create an emergency fund. Experts recommend saving three to six months’ worth of expenses in an emergency fund in case you lose your primary source of income. Without an emergency fund, you may find yourself in a situation where you have to take on debt or sell investments at a loss to stay afloat financially.
Consider your investment timeline. Moving your investments from riskier to more secure assets as you get older is recommended to preserve your capital as you get closer to retirement. For example, you might invest primarily in stocks in your 20s and 30s and then transition into a larger bond portfolio as you approach retirement age.
Diversify your holdings. Even if you are younger and more risk-averse, it’s important to consider the potential drawbacks of only holding one type of asset in your portfolio. A diversified portfolio helps you mitigate risk during market volatility by spreading your money across multiple investment types.
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