Assignment 2: Investing in the Future Due Week 8 and worth 250 points Sam Johnso
ID: 2789836 • Letter: A
Question
Assignment 2: Investing in the Future Due Week 8 and worth 250 points
Sam Johnson has created some financial goals for himself. He is 40 years old, currently has a great job, and pays his bills on time. He wants to save enough money to put his children–currently ages 3 and 8, through college. He also wants to retire at the age of 60. He puts $150 a month in a savings account, paying less than 1% in interest. He wants to earn more interest with the money he is saving. In order to do this he needs to learn more about investing. Use the Internet to research the different stocks, bonds, and mutual funds available to investors today.
Write a five to six 5-6 page paper in which you: Discuss the overall role of investing in personal financial planning.
1. Discuss three (3) attributes of three (3) different stocks that would be a good choice for Sam's financial profile based on your Internet research. Analyze the advantages and disadvantages (i.e., risks and rewards) that Sam should be aware of when investing in stocks, bonds, and mutual funds.
2. Discuss the manner in which mutual funds are generally used, and examine key reasons why, based on Sam’s profile, mutual funds would be a suitable investment vehicle for him based on your Internet research.
Use at least three (3) quality resources in this assignment. Note: Wikipedia and similar Websites do not qualify as quality resources.
Explanation / Answer
In order to meet the financial goal for himself and his children we need to create an Investment Policy Statement (IPS). The IPS has following components
It covers about what is IPS and how it helps an investor to prepare investment strategies for long term.
It covers the objective of IPS and what are purposes behind the investment that includes development of sufficient funds to support retirement incomes, college tuition of children etc.
It talks about the duties and responsibilities of portfolio manager and investor. It covers do’s and doesn’t for both of them.
It is about the process to follow regarding investment opportunities. It also talks about how the investment activities to be carried out, the frequency of activities etc. It will be a passive or active investment.
It is about specific objectives of the investment. That include amount of money for each activities and rate of return etc.
The constraints including risk tolerance, financial constraints, restrictions of certain stocks or industry from investment etc.
Review the investment performance and compare the return with the stated one and take appropriate actions.
Use various references both internal and external while preparing the document.
Answer 1.
Three attributes of stocks are
Price to Earning Ratio (P/E Ratio)
Earning per Share (EPS)
Price to Book Ratio (P/B Ratio)
These attributes are good judgement of performance of any stock. The ratios can be compared with other companies from same industry to measure the relative performance.
Investing in bonds (fixed income) and mutual funds are safe bet relatively to investing in stocks directly. Bonds are rated by rating agencies and have some level to quality to choose and mutual funds are managed by fund houses that can give good returns. But, stock market volatilities can erode Sam’s portfolio or reduce earning if they are not managed on day to day basis unlike MF or Bonds.
Answer 2
Mutual Funds are pooled funds that are built by contributions from many small investors like Sam who can’t afford to go directly to stock market and buy large amount. MF are two types open end and close end.
MF is a long term investment tool so for investor like Sam would choose MF for as long term investing strategy.
Since, he has 20 more years for his retirement and at least 10 years for his elder child to go to college therefore, Sam must start investment in various types of MF like equity oriented, fixed income oriented or hybrid MFs with a mix of risk and rewards strategies