This is a common question although the starting point in terms of cash varies. It certainly makes a difference how old the person is, their general knowledge about investing and finance, and the particulars of their financial statement.
Here is what I suggested sticking to regular themes I have written about before and broadly speaking would be a conservative approach emphasizing safety, diversity, liquidity, dividends and the potential for growth far exceeding cash in the mattress or in a money market account. I also think that it is important for beginners to educate themselves so my suggestions include an educational aspect.
It is critical to protect yourself against market volatility as best you can and this goes double for when your just starting out. For this reason Step No. 1 is to put about a third of the funds in bonds. This is very conservative, provides a high yield and dampens market volatility. It is a baby step in the right direction. This was discussed in Serious Money: ETF that's better than cash.
For this portion of the funds I recommended the Vanguard Total Bond Market ETF (NYSE: BND). You can buy 100 shares for about $7,800 as of yesterday's close. It pays about 4% and can be cashed out if need be almost immediately.
Historically, equity will appreciate faster than debt, and index funds have beaten stock picking 80% of the time while costing less to own. For the next third of the money, Step No. 2, I recommended the Vanguard Total Stock Market ETF (NYSE: VTI). This will pay about a 3% yield and owns thousands of stocks. It closed yesterday around $51. If you buy 150 shares it will cost about $7,700.
These two funds would actually be a good start for most people and if that was all they owned and they want to sleep easy it would be enough without any other moves. However, if that was the case I would invest one third in bonds and two thirds in stocks. These two investments give you a higher yield than cash and you will own a very large segment of the bond and stock market. Together it will consume $15,500 of your $25,000 leaving $9,500.
The next step is not essential, but I recommended it because I think it is important to ones education to feel ownership in something specific: read the annual reports and become familiar with the workings of the market and business in general. Step No. 3 adds four stocks in different industries, that have long histories of superior management, branding power, dividends, admirable balance sheets and they are in businesses that have been around and will be around a long time. I have written about all of them and the most recent post is linked.
Johnson & Johnson (NYSE: JNJ) closed at $60.59 so say 50 shares costs about $3,100. Serious Money: Five high-yield, safe, diversified stocks
Olin Company (NYSE: OLN) closed at $14.18 so say 150 shares costs about $2,100. Chasing Value: 5% yield from Olin, a 'boring' old company
United Parcel (NYSE: UPS) closed at $54.53 so say 50 shares costs about $2,800. Serious Money: UPS -- No sure things, but ...
Wells Fargo (NYSE: WFC) closed at 27.17 so 100 shares costs about $2,700. Chasing Value: Wells Fargo - squeezing out the shorts!
These four buys total $9,700, but I am confident my inquisitive banker friend can come up with the extra $200. Some people might recommend getting equal dollar values of each stock and let the number of shares be odd numbers. This might be alright for large numbers of shares but not for so few. It is better not to have odd lots. These figures are close enough to balanced.
There are many more solid companies that one might include, but I think the point has been made about the approach to take. When it comes time to invest the next $25,000 I would alter the mix some. I would split the money equally between the stock index fund and the individual stocks and exclude the bond fund reducing it as a percentage of the total, favoring equity over debt.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of everything discussed BND, VTI, JNJ, OLN, UPS, and WFC.