Todd O’Hanlon has worked in the management services division of Focus Consultant
ID: 2716336 • Letter: T
Question
Todd O’Hanlon has worked in the management services division of Focus Consultants for the past five years. He currently earns an annual salary of about $120,000. At 33, he’s still a bachelor and has accumulated about $100,000 in savings over the past few years. He keeps his savings in a money market account, where it earns about 3 percent interest. Todd wants to get “a bigger bang for his buck,” so he has considered withdrawing $50,000 from his money market account and investing it in the stock market. He feels that such an investment can easily earn more than 3 percent. Heidi Jackson, a close friend, suggests that he invest in mutual fund shares. Todd has approached you, his broker, for advice.
What special fund features might help Todd achieve his investment objectives? What types of mutual funds or ETFs would you recommend to Todd? What recommendations would you make regarding Todd’s dilemma about whether to go into stocks, mutual funds, or ETFs? Explain. Explain to Todd the rationale for choosing ETFs over mutual funds.
Explanation / Answer
Special Fund Features that might help Todd achieve his investment objectives are:
a. Professional Management
b. Diversification
c. Affordability and
d. Liquidity.
Types of Mutual Funds recommended are :
a. Money Market Funds.
b. Bond Funds
c. Stock Funds or
d. Target Date Funds.
Types of ETFS recemmended are :
a. DB USD Index Bullish
b. Bloomberg US Dollar Bullish Fund
Recommendation that would help to solve the dilemma of Todd :
If Todd investes his amount in stock market he expects to earn more than 3 percent (i.e. greater than what he is earning now). However, if he has to make a choice between investing in stock or mutual funds, or ETFs he should consider the following:
i. Mutual Funds offers diversification , convenience and lower costs.
ii. Investment in stocks is risky because the investors portfolio is severely affected when one of those stocks declines in price.
Rationale for choosing ETFs over Mutual Funds:
a. ETFs are growing even more popular than Mutal Funds and stock because of the following reasons:
i. Combination of Best Characterisitics of both Stock and Mutual Funds.
ii. No Investment Minimums.
iii. Lower Cost Alternative
iv. Tax friendly investing and
v. More Trading control.