Historically, the stock market has consistently made better returns than other forms of investments over the years. Even after factoring in inflation, the S&P 500 has produced an annualized return of around 10%. And some investors have made greater returns than the S&P 500. For instance, Berkshire Hathaway has made a 20% return between 1965 – 2020.   

$10,000 is a good chunk of capital to start investing today. And if deployed correctly, relying on detailed and thorough research, stocks should be able to give me a decent return on investment. So how would I invest $10,000 in the stock market today?

Why not consider an index fund?

As an investor, one of the things I think is essential for my portfolio is diversification. And an index fund is probably one of the easiest ways to achieve this.

As a reminder, an index fund tracks the performance on an underlying index, such as the S&P 500. By buying shares, I have effectively invested my capital across all the companies within the underlying index. That’s undoubtedly taken care of the diversification problems. And it also means I don’t have to deal with the rigours of picking individual stocks.

That’s why legendary investor Warren Buffett has said, “my regular recommendation has been low-cost S&P 500 index fund”. While the returns on an index fund can be mediocre compared to some expert investors performance, a 10% average annual growth rate is nothing to scoff at, especially given the lack of effort involved. 

Personally, I’m looking at the Vanguard 500 Index Fund – Admiral Shares. It tracks the top 500 largest US companies using the S&P 500 as the underlying index. When the S&P 500 index goes up, so does my investment. Of course, the opposite is also true. 

Another fund that caught my attention is the Schwab S&P 500 Index Fund. What’s interesting about this one is that it has no minimum investment requirements and only has a 0.02% annual fee.

The index funds can make investing in the stock market less risky. However, the returns may not be as high as one will make investing in few quality companies. 

Picking individual companies on the stock market

If I want a greater return at the cost of more risk, stock picking is one way to go. Instead of relying on a fund, I can pick the companies I want to own directly. 

I always use a long-term investment strategy, as I believe “time in the market is better than timing the market”. However, buying and holding isn’t a great idea if the underlying business is of poor quality. 

Picking individual stocks requires a lot of research into the business. I tend to look for a company with consistent earnings growth over the years and significant advantages over its competitors. But more importantly, I want to know what risks and threats these firms have to deal with. In today’s stock market, all it takes is a young innovative company to disrupt an entire industry. 

The bottom line

Personally, if I were investing $10,000 in the stock market today, I would create a portfolio with a blend of hand-picked companies as well as an index fund. While stock picking can yield significantly higher returns, it also comes with an added level of risk that an index fund helps mitigate. At least, that’s what I think.