Custom essays on Investment

. Discuss which factors may drive Kristin’s decision related to her investment choices.
Kristin is likely to choose long-term investments, since one of her financial goals will definitely be retirement planning. Other personal circumstances might also change her financial preferences (e.g. accommodation needs, mortgage payments, marriage, medical expenses of close relatives, birth of a child, savings for the child’s college fees, etc.). Kristin will need a high return rate for her portfolio because many of the above-mentioned circumstances might seriously affect her financial position.
Since Kristin can only plan for retirement now with a high level of certainty, she should choose a portfolio with high long-term returns in order to secure her future needs. Considering that she is planning for retirement only, let us estimate her financial potential. Supposing that Kristin will retire when she’s 65 years old, the evaluation should be done for 39 years. Let us suppose that the average return rate of her portfolio is 9% (combined stocks and bonds risk-seeking portfolio). Then, if she invests her $15,000 for 39 years, their future value will be $15,000*(1+0.09)^39 = $432,300. If she continues to add $8,000 every year starting from the next year, the value of this annuity in 38 years will be $8,000*((1+0.09)^38-1)/0.09 ~ $2,261,038; thus, total sum accumulated by Kristin in 39 years will be $2,693,338. Supposing that her annual spending during retirement time increases to $2,000 per month, which is $24,000 annually, plus annual insurance premium of $35,000, it is possible to evaluate her spending (in current prices) as $59,000 annually. Average inflation rate during the last 10 years is 2.41%, and thus inflation factor for a 39-year period is 2.53 (Gitman & Joehnk & Billingsley, 2010).

Annual Kristin’s spending in 39 years is expected to be approximately $149,463. Annual 9% return for the accumulated sum constitutes approximately $242,400. Thus, current Kristin’s saving plans will allow her to live on the interest payments during her retirement; moreover, her financial position currently allows to choose a more risky portfolio with higher returns (she will definitely need them for family and accommodation purposes later).
4. Recommend to Kristin the best available investment alternative for her. Explain your reasoning.
Currently Kristin should focus her attention on long-term investment options with high return first of all. These options are growth and income mutual funds (good for a beginning investor), and corporate bonds. Moreover, Kristin’s financial situation can change in the course of life: marriage, birth of a child and career growth will definitely change her investment preferences. Thus, she should invest into intermediate-term bonds in order to be able to reconfigure her portfolio in some time (Garman & Forgue, 2009). Overall, it is possible to recommend Kristin to reconsider her portfolio every 5 years.
Kristin also needs to make stable stocks and bonds like blue-chip stocks and municipal bonds part of her portfolio, especially in the conditions of the expected market recession and high stock volatility. A certain percentage of short-term market securities is recommended for emergency purpose (in addition to her CD of $3,000). Overall, it is possible to recommend the following investment portfolio to Kristin:
 10% in short-term market securities
 29% in municipal bonds, TIPS or intermediate-term discount bonds, that will mature in 10 years (when the portfolio will be reconsidered)
 20% in growth and income mutual funds
 20% in corporate bonds
 20% in blue-chip common stocks or value funds
 1% in CDs

References
Brechner, R.A. (2009). Contemporary Mathematics for Business and Consumers. Cengage Learning.
Garman, E.T. & Forgue, R. (2009). Personal Finance. Cengage Learning.
Gitman, L.J. & Joehnk, M. & Billingsley, R.S. (2010). Personal Financial Planning. Cengage Learning.