Successful Investors: What Would You Do in 2022 With a Blank Slate and $5,000?

There’s nothing like welcoming the new year with a fresh start and $5,000 to spend in the stock market. But what should you buy?

Successful investors have the knowledge and experience that can help you spend that money by building a diversified portfolio. In order to help you employ that money to create wealth, three Motley Fool contributors share what they would buy if they were starting out 2022 with $5,000 to invest. See why they’ve chosen the exchange-traded funds Roundhill Ball Metaverse ETF (NYSEMKT: META) and the Invesco S&P 500 Equal Weight ETF (NYSEMKT: RSP), along with Coca-Cola (NYSE: KO), among several other holdings, to spend your money on in 2022.

A balanced portfolio for fun and profit

Barbara Eisner Bayer (a diversified portfolio): If there’s one thing I’ve learned throughout my 26-year investing career, it’s the importance of diversification. While it’s tempting for beginning investors to put most of their money on current hot stocks, I’ve learned that one of the secrets of creating wealth is to minimize risk. And one way to do that is to spread your investments over a variety of asset classes and industries.

If I had $5,000 and were just starting out, I’d diversify in three ways. First, I’d put 60% of that money ($3,000) into an S&P 500 index fund, like the iShares Core S&P 500 ETF (NYSEMKT: IVV). Speaking of instant diversification, this fund enables you to invest in the 500 most profitable businesses in the U.S., so you’ll have exposure to some of the world’s greatest companies through one simple investment. And over the long term, the S&P 500 has given investors a more than 10% average annual return.

Second, in order to mitigate risk and keep my opportunities open, I’d keep 20% ($1,000) in cash or a money market fund. This way, as I became more educated about individual stocks, I would have capital on hand to purchase an equity of my own choosing. If you’d like a slightly better return on that cash, you could purchase a short-term bond fund, like the SPDR Portfolio Short Term Corporate Bond ETF (NYSEMKT: SPSB). Since you can buy and sell an ETF on the stock market, you could easily sell and generate cash if you need it.

But the fun part would be how I’d spend my last $1,000. If I were just starting out, I’d want to invest in the future — and for me, that means two things: the metaverse and cryptocurrency. (This would be the “high risk” part of my portfolio.) However, I’d want to minimize my risk by investing in exchange-traded funds, which would give me wide exposure to companies in those industries.

For the metaverse, I’d put 10% ($500) in the Roundhill Ball Metaverse ETF (NYSEMKT: META). According to Roundhill investments, this would cover companies that would be successors “to the current internet that will be interoperable, persistent, synchronous, open to unlimited participants with a fully functioning economy, and an experience that spans the virtual and ‘real’ world.” In plain English, it would include companies in computing, networking, virtual platforms, interchanges, payments, etc. The ETF includes future metaversers like Nvidia, Roblox, Meta Platforms, and Microsoft, to name a few.

Finally, my last 10% ($500) would be invested in a cryptocurrency ETF, like the ProShares Bitcoin Strategy ETF (NYSEMKT: BITO). While I don’t know the future of crypto and if, indeed, it will become a part of our financial system, it’s a bet I’m willing to make with a small amount of cash. That’s why I’d invest $500 into either a fund or use it to purchase an individual cryptocurrency like Bitcoin, Ethereum, or Solana.

Voila! Now that I’ve created a diversified portfolio, I can sit back and watch it grow while I’m learning more about investing in individual stocks. But I always want to stay diversified so I can minimize risk while creating wealth.

Building a diversified base in a Roth IRA

Chuck Saletta (Invesco S&P 500 Equal Weight ETF): If I were starting from scratch with $5,000, the first thing I would do would be to figure out how to get that money into a Roth IRA. Once money is inside a Roth IRA, it can compound completely tax-free for the remainder of the original account owner’s life. That makes Roth IRAs an incredibly powerful tool for anyone just starting out on a lifelong investing journey.

For those below age 50, the annual contribution limit is $6,000 in both 2021 and 2022, and if you’re age 50+, the limit becomes $7,000. You do need sufficient earned income (such as a salary or contractor-style income) to cover your contribution amount. If your income is too high to directly contribute, you might be able to make a backdoor Roth IRA contribution to get money into your plan.

Getting money into a Roth IRA is half the battle. The other half is figuring out where to invest it. If I were just starting out, I’d likely invest in the Invesco S&P 500 Equal Weight ETF. Index investing has long been a great way to beat Wall Street’s best and brightest, which makes building a base, long-term-focused portfolio on a solid index fund a great first step for most investors.

If there’s a risk in traditional S&P 500 index funds, though, it’s that they’ve become a bit too “top heavy.” The top 10 companies (represented by 11 stocks in the index due to dual-class shares of some companies) represent over 30% of the current market-cap weighting of the index. As a result, a serious problem in any of those companies could have a disproportionate effect on index investors who thought they were better diversified.

The Invesco S&P 500 Equal Weight ETF addresses that concern by giving an approximately equal weighting to each company in the index. That allows it to be better diversified than a typical market-cap weighted S&P 500 fund, while still investing in the same companies. Indeed, the top 10 holdings in the Invesco S&P 500 Equal Weight ETF represent less than 3% of its asset base, giving it a far lower concentration risk.

Divided we stand

Eric Volkman (dividend stocks/speculative picks): I would allocate my $5,000 between somewhat low-priced stocks in two categories at opposite ends of the spectrum: income and speculative. Personally, I’d be comfortable with a 65/35 split (favoring the income side of the two), but this, of course, depends on an individual’s tolerance for risk — or lack thereof.

For income, I’d look for stocks that hit the sweet spot between reliable cash generation and an above-average dividend yield (while also being modestly priced). What I’d be after here are businesses that pump out relatively lucrative payouts and can be counted on to do so to the point where I’m buying “set it and forget it” titles.

The real estate investment trust (REIT) sector is a fine place to start sniffing around for such truffles. After all, a REIT — effectively a landlord with a big portfolio — typically has years of thick cash flow in front of it (assuming occupancy rates are robust, and its leases are relatively long term). Also, to maintain their REIT status, these companies are required to pay out the bulk of their net earnings as shareholder dividends.

REITs that hit my criteria include retail specialist STORE Capital (NYSE: STOR) and medical facilities landlord Physicians Realty Trust (NYSE: DOC).

For good and generous shareholder payers outside the REIT sector, it’s wise to look at the Dividend Aristocrats and Dividend Kings. Among these, I’ve been a longtime bull for Coca-Cola (NYSE: KO), as I feel the company continues to punch above its weight, given the world’s pivot toward healthier food and drinks.

Investors can have some real fun (not to mention ride a serious stock-price upswing) allocating some of their money to the more speculative stocks out there.

So many to choose from! I’d look for some potential winners in beaten-down industries that are poised for a comeback. I’m thinking in particular of the marijuana sector, which has fallen out of favor due to its many consistently money-losing companies and the on-again, off-again nature of legalization.

But there are needles in this haystack, and I believe we’ll either see full decriminalization of the drug on the federal level or at least an expansion of recreational legalization in more states in the coming years. When that happens, the better pot companies will benefit handsomely.

As with any cluster of speculative stocks, we have to tread carefully and be very selective. If going green, I’d select titles like well-curated pot exchange-traded fund AdvisorShares Pure US Cannabis ETF (NYSEMKT: MSOS) — which I recently bought for my own portfolio — or the expansive and (gasp!) occasionally profitable multi-state operator (MSO) Trulieve Cannabis (OTC: TCNNF).

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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Barbara Eisner Bayer owns Meta Platforms, Inc. Chuck Saletta owns Microsoft. Eric Volkman owns AdvisorShares Pure US Cannabis ETF, Bitcoin, Ethereum, and Meta Platforms, Inc. The Motley Fool owns and recommends Bitcoin, Ethereum, Meta Platforms, Inc., Microsoft, Nvidia, Roblox Corporation, and Trulieve Cannabis Corp. The Motley Fool recommends Physicians Realty Trust and STORE Capital. The Motley Fool has a disclosure policy.