Good Example Of Money Management And Investments Essay

Situation Analysis and Investment Plan

Age is a very important consideration when making investment decisions. In general, investing in riskier financial instruments such as equities and MFs and ETFs are more ideal for younger individuals, particularly those who are between their early twenties and thirties. This is mainly because of the fact that younger individuals have more time and the more time an individual has the more investing mistakes he can actually afford. Older individuals, particularly those in their 40s and also those in the near-retirement age range. In this case, we are dealing with a 36 year old individual who has an annual savings from employment of $10,000 a year. Assuming that he invests 40% of this annual savings for his emergency fund, then it may be safe to say that we have an individual who can allocate $6,000 a year for investments. Because the of the individual’s age, he is now five years away from turning 40, his appetite for risk must be lowered considerably. Instead of going all-in in high risk equities, his investment allocation strategy must be more balanced than aggressive. This means that we are going to increase the diversity of his investment options. The table below shows the percentage allocated for each financial instrument in the individual’s portfolio.
Below is a table that shows the most preferred ETFs for the current client. Considering, the age of the client, he still has a lot of years, assuming that he would pull out all of his investments by the time he reaches the retirement age of 60. This is a perfect opportunity to invest in ETFs that invest its capital in second-tier stocks and companies or those that have high growth perspectives. This means that ETFs that invest in large caps would already be out of the choices because these ETFs, although relatively more stable than the latter group of ETFs, do not offer a high ceiling of returns.
Notice that all of the ETFs above expend their capital funds by buying equities of small to mid-cap corporations. These are the companies and corporations that have high chances of becoming large caps or what they call in the equities market as blue chips and by the time they reach that status, their per share prices would have already jumped by a huge margin, making the net asset value per unit or share of ETFs and MFs that have bought those companies’ shares’ jump by a huge margin, leading to a huge profit potential for individuals like this 36 year-old client. However there is really no guarantee that things would go north. Things may go south for these growth companies because well, they are still in their growth stages. This is where the purpose of the fixed income and more conservative financial instruments would come in. Suppose the market value of the chosen ETFs above go south, the fixed gains that these conservative financial instruments offer would serve as an offset mechanism for the client. This means that the losses incurred from the loss of the ETFs value would be compensated for by the gains acquired from the fixed income financial instruments such as bonds and preferred shares.