Kristin Earhardt is a 26-year-old management trainee at a large chemical company
ID: 2761783 • Letter: K
Question
Kristin Earhardt is a 26-year-old management trainee at a large chemical company. She is single and has no plans for marriage. Her annual salary is $34, 000 (placing her in the 1 5% tax bracket), and her monthly expenditures come to approximately $1 ,500. During the past year or so, Kristin has managed to save around $8, 000, and she expects to continue saving at least that amount each year for the fore-seeable future. Her company pays the premium on her $35,000 life insurance policy. Because Kristin’s entire education was financed by scholarships, she was able to save money from the summer and part-time jobs she held as a student. Altogether, she has a nest egg of nearly $1 8, 000, out of which she’d like to invest about $1 5,000. She’ll keep the remaining $3, 000 in a bank CD that pays 3% interest and will use this money only in an emergency. Kristin can afford to take more risks than someone with family obligations can, but she doesn’t wish to be a speculator; she simply wants to earn an attractive rate of return on her investments.
Critical Thinking Questions
What investment options are open to Kristin and discuss the factors you would consider when analyzing these alternate investment vehicles.
Explanation / Answer
The factors to consider are:
Kristin is young at an age of 26. So she has age on her side. This suggest that she should put large amount of her savings in equity related instruments
She can put about 40% of money (savings of 15,000 =6000) in small and mid cap companies that would give her huge profits over long time. However, these tend to be the most volatile in the short term.
I would suggest her to put another 30% of her money (savings of 15,000 = 4500) in large cap companies or large cap mutual funds to give stability.
The remaining 30% of her nest egg ( $4500), I would suggest her to put them in emerging market as these are expected to grow at a very high rate in the next few years. Hence this amount could be put in emerging market funds.
For her monthly savings (of $8000 a month), she could put about 40% in high yield AAA rated corporate bonds and the remaining, she can investing in a combination of midcap and large cap mutual funds.
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