How I’d Invest $50,000 for Retirement, if I Had to Start From Scratch

Do you ever wish you could hit a “reset” button for your portfolio and simply start over? Perhaps you'd do things differently with the profound wisdom that only comes from mistakes. Or maybe you're feeling trapped by a prospective tax bill.

Whatever the case, if I had a chance to start — or restart — with a clean slate, here's exactly what my portfolio would look like the day after I was able to invest $50,000 worth of otherwise idle cash.

$20,000 in a simple index fund

I won't say it's impossible to beat the market. I will say, however, it's darn difficult to do so. Even most professional stock pickers can't do it consistently.

In its most recent annual look at the data, S&P Global determined that 85% of mutual funds available to U.S. investors actually underperformed the S&P 500 benchmark last year. It wasn't just a one-year phenomenon, though. Over the past five years, 74% of funds lagged the broad market. For the past 10 years, 83% of domestic funds failed to beat the S&P 500.

And, for the record, it's not like any given year's market-beating funds consistently beat the market. Only 58% of the mutual funds that led the market in 2019 did so again in 2020, and only 7% of them were still top performers as if 2021.

Read between the lines. An effort to beat the market often leads to subpar performance. Your best bet is to start with a healthy position in the market itself, knowing that given enough time, stocks as a whole will generate inflation-beating wealth. My weapon of choice is the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) index fund, which is meant to mirror the performance of the S&P 500 itself.

A $10,000 stake in Berkshire Hathaway

If it just doesn't feel right to not at least give yourself a chance to beat the market, I get it. Might I suggest a good-sized stake in Warren Buffett's Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) as the top means of satisfying this itch?

I know, I know… Value investing is dead, Buffett's approach is oversimplified, and besides, the technology stocks he and his acolytes typically eschew are obviously the future.

Except, those objections are misguided at best, and outright wrong at worst.

Yes, value-laden Berkshire lagged for the better part of the recovery from the early 2021 drubbing. However, a funny thing happened this year when stocks began peeling back. Berkshire Hathaway didn't follow suit, continuing to rally through March. The bearish undertow eventually got the better of these stocks, but Berkshire Hathaway is still much closer to breakeven for the year than the broad market.

Data by YCharts.

And this isn't the first time we've seen Buffett's stodgy picks shine shortly after his approach was panned for ignoring growth opportunities. Berkshire began to rally in early 2000 when most other stocks were being up-ended by the dot-com crash that persisted through 2002. Buffett's fund also outperformed the broad market in 2016 and 2017, when it wasn't clear where the economy was headed under then-President Donald Trump.

Value investing isn't dead. It's just cyclical, rewarding shareholders for their patience.

$2,000 each in Microsoft, BlackRock, and Taiwan Semiconductor

Finally, with $20,000 worth of my $50,000 left to put to work, I'm ready to start buying individual stocks. I'm not in any hurry to do so, though, so I'm only selecting three right now, allocating $2,000 to each of them.

My interest in Microsoft (NASDAQ: MSFT) isn't a tough one to figure out. If you're using a computer, you're likely using at least one Microsoft product. Even if you're not using a Windows-based computer, odds are good you're benefiting from a service provided by Microsoft. The company is waist-deep in the cloud computing market, too. Synergy Research Group estimates that Microsoft's cloud-management platforms account for 22% of the private cloud market, yet this is still just a taste of what the company offers.

You may be more familiar with BlackRock (NYSE: BLK) than you realize. It's the name behind iShares exchange-traded funds.

Yes, the investment management business typically falls out of favor when stocks are struggling, seemingly because investors fear a falling market crimps an investment management firm's top and bottom lines. And to some degree, this is true. The underlying assumption is flawed, though. Most investment management companies aren't paid based on their offerings' performances. They're paid a flat percentage of the value of the assets they manage. While the S&P 500's 20% slide this year shrinks BlackRock's revenue potential by the same 20%, it's still collecting most of last year's revenue and will grow that revenue-bearing base again as soon as the market starts to recover. The stock's 35% sell-off since November is simply overblown.

Finally, while the current chip shortage is a problem for most of the tech industry, it's actually a boon for Taiwan Semiconductor Manufacturing Company (NYSE: TSM), which makes chips on behalf of several companies in the business. Taiwan Semiconductor Manufacturing's client list includes Apple, Advanced Micro Devices, and Qualcomm, just to name a few. I know the semiconductor shortage is prompting many chip companies to establish more of their own manufacturing facilities. But given how increasingly reliant we are on technology, I can't see a time when the tech sector won't need to outsource much of its manufacturing needs.

Keep the rest ready

The remaining $14,000 will be parked in the portfolio for future buying opportunities as they arise, with each of them allocated the same $2,000 that BlackRock, Taiwan Semiconductor, and Microsoft got. These likely won't surface within the coming week, although I'd be very surprised if this last bit of retirement savings weren't deployed before the end of the year.

Almost needless to say, The Motley Fool is arguably your best resource for finding those stocks when the time comes.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Berkshire Hathaway (B shares), Microsoft, Qualcomm, S&P Global, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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