For a average 5% return, the stock market is the only way to go now. I would have it in mostly stocks now and as you get closer to your 10 year goal, reduce your stock exposure.
It's not that hard to get 5% return at much lower risk right now with corporate bonds. An investment in corporate bonds held to maturity would have no market risk either. There would be default risk but that can be kept very low with a diversified portfolio.
Stocks are clearly not "the only way to go" although I do think stocks are one category that should be considered for this investment.
For me, I would go with:
25% dividend paying stocks and ETF's ex: VZ, JNK, etc.
JNK is NOT a stock. It is a junk bond mutual fund. VZ is a risky stock. I don't think it is consistent with the stated risk tolerance.
25% large cap US. ex: VTI, etc.
VTI is a "total stock market" fund. It is about 75% large cap and about 25% small cap. Not a bad suggestion but please don't mischaracterize it as a large cap fund.
25% foreign, emerging markets ex: EEM, VT, etc
Emerging markets are not consistent with the stated risk tolerance.
25% financials, real estate ex: XLF, RWO, etc.
I would not touch financials at this point, with very few exceptions. They are facing significant headwinds worldwide. I have no opinion about real estate.
And keep some cash on hand is case the market tanks so you can get in on some discounted prices.
I could be wrong but I took the question to be soliciting suggestions for a "handsoff" portfolio. If the OP wants to actively trade then there is nothing wrong with your suggestion but for a buy-and-forget investments that advice is anathema.
The key is to diversify ,re-balance, dollar cost average.
The OP also specified that the investment will be a lump sum $35000 now with a $400 monthly deposit. While that $35000 could be dollar-cost-averaged in, that would leave the additional question of determining over which period. That is a timing decision. If you want to make a timing decision you can just decide to time when to put the entire $35000 into the market.
I agree that diversification is important. In my opinion one should never have more that 4% (1/25) in any individual stock. In this case that is $1400. I think that is too small of a position to invest efficiently in an individual stock so I would stick with ETFs or mutual funds.
OP, you also did not describe the use of this money. That is key since it could impact what I would suggest. For example, if this will be used for a child's education, and if you are a US investor, then high quality zero coupon bonds might be perfect. Those could be a terrible choice if you have a different use in mind.
Can you provide more information?
- What will you use the money for?
- Do you intend to actively trade or do you want to buy something now and forget about it for 10 years?
- What do you mean by 15% risk tolerance? Do you mean you don't mind losing 15% in one day? One investment? Would losing 15% of your money over the 10 years be acceptable?
- What is your tax situation? If this investment produces income, what rate will it be taxed at?