Sarah Mix is a single, 30-year-old business owner who has $500 a month to invest

Question

Sarah Mix is a single, 30-year-old business owner who has $500 a month to invest. This money is in excess of the contribution to her company pension plan. Sarah hears that many of her friends are investing in mutual funds. Her grandfather, Grandpa Russ, invested in the stock market, and lost everything. He advises her to invest only in bonds. Her uncle, Sam, thinks that she should invest in stock mutual funds, but only in conservatively managed funds that invest in U.S. blue-chip stocks. Sarah notes that her Grandpa is 70 years old and her uncle is 55 years old. Her friend Jane, who is also 30 years old, said she only invests in small capital growth funds.

a. What would you advise Sarah to invest in?

b. Why do you think these people have different investment strategies?

Explanation / Answer

a. The age of the investor is critically important when considering equity related investments whether direct stock or mutual funds. Her Grandpa was 70 years old was did not have time on his side. Hence he invested for a short time and lost the money. In equity investments, the time horizon should be anywhere between 5 -10 years and also for retirement which is 35 years away for Sarah. Hence she should not consider her grandpa advice. Similarly, her Uncle is in his mid 50's and can take minimal risk and has invested in blue chips. Since she is only 30 years old and has time on her side, she should invest in small and mid-cap funds which will give the maximum return over the long term.

b. Different people have different investment strategies based on their age. Ideal strategy is to invest (100- age) in equity and reminder in debt investments. So a 70, year old will invest (100-70) = 30% in equity and 50% in debt. Similarly, a 40 year old should invest (100-40) = 60% in equity and 40% in debt. This formula holds good based on the age of the investor.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.