|Topics:||🏆 Career Goals, Investments, 💸 Accounting, 💵 Finance, 👔 Job|
Most Americans retire before or at the age of 65 (Quinn & Joseph, 2010, p. 48). Josh and Pam still have 20 and 22 years respectively to reach age 65. This is their time to invest. Their youngest child, at 11, still has a long way to go to become financially independent. At such a moment therefore, they both should have investments with high cash inflows. This will not only assist in securing their own future but will also act as an insurance for their children who still depend on them.
Even though conservative stocks have low risk, their return on investment is also very low (Campbell, John, Christophe and Tuomo, 2010, p. 341). The Brocks should consider cashing out some of their funds invested in these stocks and diversifying their portfolio further. Furthermore, they have a ‘defensive growth’ mechanism. Since the family has already set aside $ 5,000 for emergency, the remaining part of their income is available for growth.
An assessment of the Brocks financial data shows that their monthly income, $ 4,900 against their living expenses, $ 4,450 leaves them with a surplus of $ 450 for potential investments. With an asset base of $ 262,700 versus liabilities amounting to $84,600, their liquidity ratio and net worth is very high (Kapoor, Jack, Les, Robert and Melissa, 2016). A big part of their assets in the form of conservative stocks are not productive enough. Apart from diverting into other investment schemes, the assets should be only slightly higher than liabilities instead of an excess of $ 178,100.
With $ 178,100, part of which may be current assets, the Brocks should consider having mutual funds, conservative stocks and other investments in the same ratio. This optimal portfolio diversification will ensure the highest returns for Josh and Pam both in the short-run and long-run (Kapoor et. al., 2016). Since they already have conservative stocks, they should reduce the amount of money in such stocks and spread their risks equally across the board.
The decision to invest in mutual funds is a hard one given that there are more than 9,200 varying mutual funds. The Brocks should first conduct a ratings check on best performing mutual funds (Campbell et. al., 2010, p. 307). According to Campbell et. al. (2010, p. 307), one of the best mutual funds is the Vanguard. A similar portion of their funds should be put in retail, an industry which has average short-term returns.
Biotechnology and environmental firms are highly risky; rarely return dividends, although their growth rates can be very high (Campbell et. al., 2010, p. 338). The Brocks must also spread part of their stock asset base into this to cater for long-term financial plans. With this cash outflow plan amongst the initial plans, the Brocks will have their best return on investment ever.
- Campbell, John Y., Christopher Polk, and Tuomo Vuolteenaho. “Growth or glamour? Fundamentals and systematic risk in stock returns.” Review of Financial Studies 23.1 (2010): 305-344.
- Kapoor, Jack R., Les R. Dlabay, Robert James. Hughes and Melissa M. Hart. Focus on personal finance: an active approach to help you achieve financial literacy. New York, NY: McGraw-Hill Education, 2016
- Quinn, Joseph. “Work, retirement, and the encore career: Elders and the future of the American workforce.” Generations 34.3 (2010): 45-55.
Offered for reference purposes only.