How would I invest $ 20,000 today if I were to start from scratch

(Chuck Saletta)

$ 20,000 can be an incredible foundation on which to build a decent long-term nest egg. If you can invest it early enough in your career and the market returns to its long-term historical rates of return, that investment alone may be enough to make you a retiree millionaire.

Of course, as 2022 reminds us, the market can go up or down. Investing your nest egg all at once can be incredibly nerve-wracking, especially if you happen to be putting your money to work for you just before another downturn in the market. On the other hand, if the market is near the bottom and you don’t invest at all, you will feel equally upset if you miss any recovery that may follow.

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The uncertainty on both sides is sufficient to drive “analysis paralysis”. However, despite short-term uncertainty, the stock market is likely to be a powerful long-term wealth creation engine. As a result, if you have $ 20,000 to invest, now may be a good time to start putting that money to work.

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How would I invest that kind of money if I started from scratch

If I were a new investor and it was my money, I would take $ 12,000 right now and get $ 6,000 in a Roth IRA for myself and another $ 6,000 in a Roth IRA for my wife. $ 6,000 per person is the maximum allowable contribution for most people under the age of 50 for calendar year 2022.

Once it’s in those accounts, I’d use the money to start buying the Invesco S&P 500 ETF Equal Weight (NYSEMKT: RSP). This being October, I would commit to buying $ 2,000 per account per month, to invest the full $ 12,000 contribution by the end of December.

Then, in early January 2023, I would take the other $ 8,000 in cash and split it between my wife’s Roth IRA and mine. Once in those accounts, I again commit to buying $ 2,000 per month on behalf of the same Invesco S&P 500 Equal Weight ETF, eventually getting all of the $ 20,000 invested by the end of February.

Why Roth IRA?

Roth IRAs are arguably the best long-term wealth creation accounts available to most Americans. As the money goes into the after-tax account, it increases the tax deferred while it’s there. Once you reach the standard retirement age, you can generally withdraw money completely tax-free or, if you prefer, you can leave it tax-free within your Roth IRA for the rest of your life.

Additionally, you can withdraw the money you contributed directly to your Roth IRA at any time and for any reason, with no taxes or penalties. You can also withdraw money that you contributed to your Roth IRA via a rollover without paying any additional taxes or penalties once the money has been in your Roth IRA for at least five years. That combination of flexibility and tax benefits makes the Roth IRA tremendously strong tools for building and managing your wealth over time.

Why the Invesco S&P 500 Equal Weight ETF?

Over time, investing in indices tends to outperform the money managed by the best and brightest on Wall Street. Warren Buffett, arguably one of the best investors of all time, would also prefer to bet on an index fund rather than a basket of hedge funds. Including all 500 companies in the S&P 500 index, the Invesco S&P 500 Equal Weight ETF has access to the same assets as a typical index fund.

By buying approximately equal dollar amounts for each choice, instead of weighting the market capitalization of the choices as a typical index fund does, the fund has less exposure to the largest companies in that index. This is important for investors concerned about diversification, as the top 10 companies in a typical S&P 500 index fund account for nearly 30% of the total index.

Compare that to the Invesco S&P 500 Equal Weight ETF, where the top 10 holdings occupy only about 2.7% of the fund. With this design, you get a fund that is less exposed to the problems affecting the largest companies, while still gaining access to low-cost ownership to the same 500 companies.

Why divide the investment over time?

When it comes to the timing of investments, there are three key reasons to split them. The first is legal: People under 50 can only contribute up to $ 6,000 to their Roth IRAs in a year. With a married couple, both under 50, that’s $ 12,000 per family. To get the full $ 20,000 in Roth IRAs, you need to split the investment over two calendar years.

The second is psychological. With the market going through such a difficult time in 2022, investing only a fraction of the money at a time makes it easier to invest some money to work. If the market continues to fall, you have even more money to invest and your investments buy far more stocks. If, on the other hand, the market starts to rebound, then you will have at least invested something close to lows, while still having a plan to put the rest of your money to work.

Third – and perhaps most important – it encourages making investing a regular habit. With this plan, you are buying a total of $ 4,000 worth of stock each month for five consecutive months. Make it not just a one-time event, but rather the initial steps of a life-long investment journey and you will put yourself on a much stronger path to the possibility of a comfortable financial future.

Even if you can’t make $ 4,000 a month after the initial $ 20,000 has been used up, making a habit of investing will make all the difference over time.

It starts now

Whether you have $ 20,000 ready to invest right now or just a little bit advanced each payday, now is a great time to get in the habit of making regular investments. The longer you care, the more time you have to let compounding work its magic for you. You’ll never have more time to retire than you have right now, so make today the day you commit to yourself to start building your long-term nest egg.

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Chuck Saletta has no position in any of the titles mentioned. The Motley Fool has no position in any of the titles mentioned. The Motley Fool has a disclosure policy.

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