A friend of mine recently asked me how I would invest $20k. This is a slightly modified version of my response. Please note, this is not investment advice - just my personal opinion of what I would do.

First, all debts - aside from mortgage or car loans under 6% - should be paid off.Ê ItÕs better to eliminate debt than to try to make money in the market.

Second, I would make sure my mortgage is at a good rate.Ê The cash will help you qualify for a good rate Ð I would recommend a 5 year ARM (adjustable rate mortgage) if you are planning to move within 5 years.

That clears the books.Ê Going forward IÕll assume you already did that, and thereÕs still $20k to invest.

I would start with funding 401K and Roth IRA accounts.Ê Make sure you are getting the match at your place of work (3% or so ongoing contributions) for 401K.Ê Invest all 401K money aggressively because that is the longest term investment.ÊFor Roth IRA, put $3,000 in for this year, and save $4,000 for January to deposit for tax year 2004.

WeÕll worry about how to invest that money in a second.Ê As far as allocation, so far we have:

1)ÊÊÊÊÊ Real Estate (own a house)
2)ÊÊÊÊÊÊ Tax Advantaged Stock Market (Roth IRA) - $7k
3)ÊÊÊÊÊÊ $13,000 cash

The Roth IRA money ($7k) is shielded from taxes, so it is a good idea to use this money in Mutual Funds.Ê ThatÕs because mutual funds have capital gains each year, and they are taxable even if you donÕt redeem (sell) your shares.ÊHowever, since the Roth IRA is shielded from taxes, you donÕt have to worry about that.Ê Therefore I would invest the $7k into aggressive mutual funds in a Roth IRA.Ê I would open the Roth IRA with an online broker, such as Schwab or AmeriTrade, that has low or no fees.Ê Good funds include some from the Retirement Corporation, including the Aggressive Opportunities Fund (VPAOX) and the Growth & Income Fund (VPGIX).

Note that contributions into a Roth IRA can be withdrawn 5 years after the account is opened with no penalty.Ê Therefore if you think you may buy a house or something in five years, the money contributed (not earnings) will be available (unlike in a 401K).

That leaves $13k.Ê For this I would recommend breaking it further into two piles, one of $9k and one of $4k.Ê The $9k I would use to open an interest bearing brokerage account at the same place that has the IRA.Ê Find some people whose investment advice you trust, and invest in a few companies.Ê This is highly aggressive so you might also consider buying some Spiders, which are the Standard & Poor 500 index broken into stock Ð the symbol is SPY, I believe.Ê You can do the same thing for the Nasdaq 100.Ê This should still be considered aggressive investing Ð donÕt do this if you will need the money within 3 years or so.Ê Best if you are in for the long term.Ê If you think you will need the money, consider safer alternatives (thatÕs another conversation).

The other $4k I would keep in a reserve cash fund for emergencies.Ê In January 2005 I would add it to the Roth IRA as another $4k contribution (build up some more reserves between now and then).Ê That way you are clear to 2006 with Roth IRA contributions.Ê You always want to put money in the Roth IRA first each year Ð i.e. in 2006 take $4k from the brokerage and add to the Roth IRA again (just buy the same stock again).

The trickiest part is deciding how to invest the $9k.Ê Personally, I would buy some Eastman Kodak ($1500), some Apple Computer ($2000), and some Berkshire Hathaway ($3500-$4000), with the balance invested in SPY or a similar index-based stock.

HereÕs how that all looks:

Step 1:Ê Preparation

Set your 401K contributions at work to at least the match rate, and preferably 10%.
Open a Roth IRA at an online broker
Open a regular (interest bearing) brokerage account at the same online broker
Open a savings account at your bank (you probably have this already)

Step 2:Ê Distribution

Deposit $3000 into Roth IRA
Deposit $8000 into savings
In January 2004 deposit $4000 into Roth IRA
In January 2005 move $4,000 to Roth IRA again
Deposit $9,000 into brokerage account

Step 3:Ê Investment

Roth IRA should utilize mutual funds.Ê Suggested investment:

50% VPAOX - Aggressive Opportunities (this includes international investments)
50% VPGRX Ð Growth & Income

Brokerage account should use stocks.Ê Suggested investments:

$1500 Eastman Kodak
$2000 Apple Computer
1 Berkshire Hathaway B share (they cost several thousand bucks)
Rest in SPY or Nasdaq 100 index stock

Please note that my stock investments are off the cuff Ð I havenÕt done research on these companies.Ê Berkshire Hathaway is Warren BuffetÕs company and is a great place to invest your cash - you could just buy 2 or 3 shares of that and forget the other stocks.Ê Eastman Kodak is very beat down but is a good company that will bounce back.Ê Apple is releasing innovative products and is establishing dominion in online music distribution and iPods.Ê

That should set you up pretty well, and you will be sure to ride the market wave as the economy improves.Ê But, it is risky and you could lose money.Ê The $4k in cash for the next year ensures that you wonÕt feel pressured to Òsell lowÓ if the market is turbulent and you need money for an emergency.