Investing in the FutureFirst Name MI Last NameInstitution Name
Investment means every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk. It is a current commitment of Rupees for a period in order to derive future cash flows. The investment may include an enterprise, stocks, and other forms of equity participation in an enterprise, bond, debenture, and other debt instruments. Individual invests because by saving or investing money, instead of spending it now, individual’s trade-off present consumption for an expected larger amount of consumption in the future.
Since, investing is associated with reduction in current consumption and increment in the future cash flows; it has huge significance in personal financial planning. The nature and module of investment derive both the present and future cash flow of individual thus it carries huge significance in personal financial planning. The plan may include the reduction in the current consumption in order to increase the available cash flow to the expected higher level in the future, allocation of financial resources for investment, allocation of methods and modules for investment, timing of investment, and plans for reinvestment if it is the continuous process for the individual. Thus, investment has all the allocation, investing, and income generating roles of individual financial planning.
Profiling Sam Johnson
Sam Johnson is 40 years old having a job as his source of income. His financial plan includes the saving of enough money for his two children through college, and financial support after his retirement at the age of 60 years. Currently, he is saving $150 per month in the saving account that pays him less than 1% of the return. According to the investment category, Sam Johnson is at the accumulation phase of investment. He is in the middle years of working career and has a longer investment horizon, as the plans are to finance the college of his children and his investment with a planning horizon of at least 10 years.
The general category of accumulation includes the financing of the retirement or children’s college with long term planning horizon with a certain degree of risk seeking attitude. Since, the financial position of Sam at current is stronger one having a job with good pay; the categorization of investors’ attitude as the one with high risk taking attribute for generating a return on his investment. Thus, Sam can expect high returns with high-risk seeking attribute so that he can finance all his financing needs by the end of his assumed planning horizon of 10 years.
Stock’s value today
MSN money today illustrated the following stocks with their values and rating as per the market on 19 February 2014:
Here, I suggest Sam go forward with any of these stocks with high ratings. Among them, I too suggest him to go with the stock with lower price compared to a higher one with a lower Earning price ratio. Earning price ratio signifies the amount of money invested in the market price of stock in order to generate a dollar in investment. I suggest him to go forward with the stock of American Equity Investment Life Holding Company that has fewer prices compared to other company with higher ratings among others. The other preferred price of stock is benchmark electronics with lesser price for the stocks. The other stock with lesser price includes Chinaedu Corporation and Clearone Inc with stock in preferred price range. The other stock as listed in the table above can have better prospect of investment in the bank.
Some of the top rated bonds as per: The street rating for fund name, and their overall rating and risk grades include the following:
Here, the most favorable bond with lesser risk with the best rating can be Colorado Bond Shares Tax-Exempt, and BlackRock Secured Credit Inv A. The other bonds as listed above are the best available investment for the company.
The Risk Return Analysis
Among the three alternatives for investment as stocks, bonds, and mutual funds, stock contains the high-risk environment for the investors and that too has the highest expected return for the investment. On the other hand, bond is the most secured sources for investment associated with the fixed return for investors. The hierarchy for investors as bondholder has high significance while the liquidation of the company, thus it is one of the secured investment with an almost fixed return for the investor. On the other hand, mutual fund contains the moderate risk environment with the holding of equity and bonds in a portfolio. Thus, the risk profile maintained by the combination of the stock, bonds and mutual funds for the investors. A most prudent and usually more rewarding strategy is to take a long-range view and focus on balancing return and risk by building a diversified portfolio of securities (Haslem, 2010, p. 154).
Here, for the allocation of fund for Sam, I recommend him to go with the portfolio of stocks for generation of high income. This can generate him with high return within the time horizon of the investor. On the other hand, since not much fixed income generating securities are required for Sam as he has the job with higher monthly payments. However, I too recommend him to have bonds in his portfolio to secure his investment for the future time.
For the active investment purpose, the portfolio can be made by including mutual funds to have the moderate risk environment and moderate return on the fund. The fund position managed by experts in the field termed as fund manager so the position of Sam can be secured with choosing of the best mutual fund scheme available with the time to actively manage the portfolio. For both stocks and bond, I suggest him to take the long planning horizon and bonds with the comparative longer planning horizon.
Significance of Mutual Fund
The mutual fund is the portfolio of different investment platforms included and managed by the fund manager. In its most basic form, mutual fund is a company that pools the money from a group of people with common investment goals to buy stocks, bonds, money market instruments, and combination of these investments, or even other funds (Mobius, 2007, p. 1). These include a sponsor company and the different companies that hold the portfolio of stock and bonds of different companies. The significance of mutual fund has good position for the investors as the active participation of fund manager is involved with the business. For Sam, taking stock and bond for long-term horizon, he can be changing the mutual fund scheme to increase and moderate the risk associated with the involvement of stock and bonds for the long-term horizon.
Sam can go for better planning horizon as he can have better real time investment schemes and can have active participation in his investment activity with the involvement of a fund manager for the position. I recommend including a better fund position mutual fund for Sam in his portfolio to manage the risk position of this investment planning.
Bibliography
citizentrade. (2012). investment . Retrieved Februray 17, 2013, from citizentrade: http://www.citizenstrade.org/ctc/wp-content/uploads/2012/06/tppinvestment.pdf
Haslem, J. A. (2010). Fund Types and Comparative Performance, Efficient Markets, Assets Allocation. In Mutual funds: Portfolio structures, analysis, management, and stewardship (p. 154). Hoboken, N.J: Wiley.
Mobius, M. (2007). An Introduction to Mutual Funds. In Mutual funds: An introduction to the core concepts (p. 1). Singapore: John Wiley & Sons (Asia).
