How I'd Invest $10,000 for the Long Term if I Had to Start From Scratch Right Now

Key Points

• With so many exchange-traded funds available, investors can easily choose a passive approach.

• Dollar-cost averaging into positions over time might make sense to gradually build a portfolio.

• Dedicating a part of the portfolio for picking single stocks is a great way to develop your investing skills.

• These 10 stocks could mint the next wave of millionaires ›

The stock market is a wonderful tool to build wealth. Historically, the S&P Index, the popular benchmark, has generated an annualized total return of 10%. Over decades, investors can benefit by achieving significant returns with some patience and discipline.

When figuring out how to first allocate capital, it can certainly be intimidating. But investors should focus on keeping things simple, and trying to consistently improve their skills over time. Your financial well-being depends on it.

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Here's how I'd invest $10,000 for the long term if I had to start from scratch right now.

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A proven method

One of the best ways to get started in investing is to go the passive route. This means that you aren't deliberately picking which individual stocks to own. Instead, it's a hands-off approach. There are many exchange-traded funds (ETFs) to choose from, providing investors with several different ways to gain exposure to various themes, sectors, or asset classes.

With $10,000 to start with, I'd put $5,000 into this passive bucket. The entire outlay doesn't have to be at once. I might consider dollar-cost averaging, investing $1,000 per month over five months to fully allocate this part of the portfolio.

The first passive investment vehicle I'd choose is the Vanguard S&P 500 ETF. As the name suggests, this ETF tracks the performance of the S&P 500. It's offered by a reputable firm that's been around since 1975. And it has a very low expense ratio of 0.03%. I'd invest $2,500 into the Vanguard S&P 500 ETF.

The remaining $2,500 would go into the Invesco QQQ Trust. While there is some overlap with the S&P 500, this ETF contains the largest 100 non-financial companies that trade on the Nasdaq exchange. It's a more concentrated strategy.

Compared to the Vanguard S&P 500 ETF, the QQQ leans heavily toward the technology sector, which represents 61% of the assets. The "Magnificent Seven" stocks have a significant weighting. I want to have more exposure to various tech-forward trends, like artificial intelligence, cloud computing, digital advertising, and streaming entertainment, which this ETF provides.

In the past decade, the Invesco QQQ Trust has produced a fantastic total return of 500% (as of Sept. 12). This easily outpaces the Vanguard S&P 500 ETF.

Taking an active approach

For many investors, putting the whole $10,000 into ETFs might be the smart move. This strategy works for those who seek a low-maintenance and hassle-free approach. And it can result in a favorable outcome.

But I'd dedicate the other half of my portfolio to active management. Since I believe I can research stocks correctly, which includes reading financial statements, conducting industry analyses, and listening to earnings calls, I want to continue to develop my stock-picking skills. This can only happen with practice.

The other $5,000 will start out in cash. And as I find potential buying opportunities, I can slowly and steadily start to put money into different businesses. There are some important attributes I'd look for. For instance, it must be a high-quality company that has a wide economic moat, pricing power, strong profitability, and a solid management team, for instance. What's more, shares should be trading at an attractive valuation.

Eventually, the portfolio will be fully invested. It might take some time to get to this point. However, this is the process I'd follow.

Over time, investors will undoubtedly add more money to their portfolios. They can continue to identify new opportunities, whether that means looking at ETFs or individual companies, or adding capital to their existing positions. Regardless of the chosen course of action, what really matters is developing a consistent approach that focuses on the long term.

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Neil Patel has positions in Invesco QQQ Trust and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.