Okay, so you’re 20 thousand dollars richer, and you want to know the best way to invest 20k. One problem: the best way how best to invest invest 20k is relative. It depends on what you want.
I mean, you could take that money to Vegas and bet it all on lucky number 13. Same with putting your money in something speculative like bitcoin or oil futures. On the other side of the spectrum, you could invest all your money in treasury bills. In investing money, the amount of interest you want should depend on whether you want to eat well or sleep well. These two examples illustrate the risk-return tradeoff.
The higher the return you need, the more risk you need to take on. Consider a concrete example: working on an oil rig. Why do these sort of jobs pay so well? If the owners of the rigs tried to pay less for labor, no one would work their. It’s too risky to justify the price. The same is true of investment securities. If you buy stocks, there’s some risk that the company will go bankrupt and you’ll lose all of your money.
Thus, you’re going to demand to be compensated for your risk. This is the reason why investing your money in the stock market will have a greater payoff than buying bonds. The risk is higher, so the return must be, too. With that background out of the way, you’re now in a position to figure out the best way to invest 20k. If you want a high return, invest in a risky asset. If you’re comfortable with a lower return for more peace of mind, pick something lower risk.
The most straightforward way is to decide on allocating some of the money into bonds and some into stocks. The more you allocate into stocks, the higher the return and the higher the risk. You need to decide on the amount of risk you want to take on, and choose your asset allocation accordingly. For more on choosing a risk tolerance, check out these graphs. Okay, so let’s assume that you have some idea about your risk tolerance and the kind of asset allocation that you’d prefer.