Investing in the Future – Sam Johnson Case Study

Sam Johnson Case Study

Sam Johnson has created some financial goals for himself.  He is 40 years old, currently has a great job, and pays his bills on time. He wants to save enough money to put his children–currently ages 3 and 8, through college. He also wants to retire at the age of 60.  He puts $150 a month in a savings account, paying less than 1% in interest. He wants to earn more interest with the money he is saving. In order to do this he needs to learn more about investing. Use the Internet to research the different stocks, bonds, and mutual funds available to investors today and paper in which you:

  • Discuss the overall role of investing in personal financial planning.
  • Discuss three (3) attributes of three (3) different stocks that would be a good choice for Sam’s financial profile based on your Internet research.
  • Analyze the advantages and disadvantages (i.e., risks and rewards) that Sam should be aware of when investing in stocks, bonds, and mutual funds.
  • Discuss the manner in which mutual funds are generally used, and examine key reasons why, based on Sam’s profile, mutual funds would be a suitable investment vehicle for him based on your Internet research.

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Different Stocks, Bonds, and Mutual Funds Available to Investors Today

Investing in the Future

In considering investing the in the future, this paper discusses, among other things, the overall role of investing in personal banking, the three attributes of three different stocks that can suit the best financial profile, and an analysis of the advantages and disadvantages of investing in stocks, bonds and mutual funds. Predicting the future has always been difficult; however, the underlying fact about the future is that it comes with its own uniqueness. This difference and uniqueness is attributed to various megatrends or deeply-rooted forces, which influence essential changes in the field of investment management industry (Goldberg, 2014). Indeed the investment management industry has experienced tremendous growth for the last thirty years, throughout which the main focus has been put on the baby boomers that have been the main drive in the industry. The strong market growth has also been reinforced by a considerable increase in capital flows at the international level as well as globalization.

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The Overall Role of Investing in Personal Financial Planning

Investing in personal financial planning is a brilliant idea because it helps a person to determine his/her short, medium and long-term financial objectives. Therefore, personal financial planning is a balanced plan that can help an individual meet his/her financial objectives. In this case, case planning for his financial future is an essential thing that Sam has chosen to do with his money. The overall role of investing in personal financial planning is to assist the investor to achieve a comfortable retirement (Kobliner, 2009). This actually is the end result of investing in the future. Considering the current instability of global economy, it is significant for people to consider taking advantage of the numerous social benefits so that they can lead a financially secure life thereafter retirement. Investing in personal financial planning is a constant reminder that the future can bring anything and therefore investing in the future is an essential effort to put life under control. In order to be successful in investing in personal financial planning, it is significant to have a fixed budget that includes investments, savings and expenses. Just like Sam, it is significant to have a monthly budget because it can assist in establishing long-term financial objectives, and in due course minimize issues that appear in the short-term budget.

It is also worth noting that the role of investing in personal financial planning is to guarantee family security. It leads to proper income management especially on a monthly basis. This, in turn leads to increased cash flow following strict monitoring of expenses and spending patterns (Slott & Trexler, 2012). Besides, an increase in cash flow is a significant step of achieving high amounts of capital. This is essential because it can enable an individual to consider investments that can lead to improved general financial well-being thereby reinforcing financial security. Investing in personal financial planning is significant for enhancing financial understanding. This is usually achievable through setting measurable and realistic financial goals. Personal financial planning is also significant for improving the standard of living. It results into savings that can be of great benefit especially during difficult times. For instance, in the case of Sam who is current 40 years old and saving $150 per month at an interest rate of less 1%, he will probably be having a substantial amount of money to secure his family. Should he retire at age 60, then he would have been able to save about $36,360. This amount is substantial enough to enable Sam accomplish his projects. Probably his young children will be completing college and he will be in a better position to support them. It is also worth noting that investing in personal financial planning plays an essential role of assisting an individual to create assets that do not become liabilities in the future.

Attributes of Three Different Stocks

There are different types of stocks that can make an appropriate choice for Sam’s investment. However, this paper will discuss attributes of three of them, which include: blue-chip stocks, income stocks and defensive stocks.

Blue-chip Stocks

These are stocks offered by stable and large companies that are known to have an impressive history in regards to stable earnings as well as dividends. They are usually characterized by the stocks constituting the Dow jones Industrial Average (Cash Cow Couple, 2015). This includes Pfizer, Microsoft, IBM, and General electric. They are usually characterized by low growth rate due to their enormous size. Therefore, investors or shareholders can earn dividends as returns from stocks. Besides, when there is an overall depression of stock prices during bear market transactions, investors can earn capital gains.

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Cyclical Stocks

These are stocks that move in cycles in respect to the movement of the cycles of the economy. This means that when the economy grows, they assume a strong upward trend, and assume a downward trend when the economy declines (Cash Cow Couple, 2015). Examples of companies that provide such stocks include Brunswick, Caterpillar and Alcoa. They usually involved in supplying big ticket items or capital equipment.

Income Stocks

Most of the returns on these stocks are generated in form of dividends, and they continue to grow on yearly basis in respect to the growing earnings of the companies. In consideration of business dynamics, these companies usually lack enough opportunities that can allow them invest in businesses that can result into desirable returns on equity of stockholders (Cash Cow Couple, 2015). For this reason, their dividend payout ratio is usually high. All these three different types of stocks mentioned in this section can make an appropriate choice for Sam’s investment.

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Advantages and Disadvantages of Investing in Stocks, Bonds and Mutual Funds

Stocks           

Stocks are certificates that symbolize a person’s ownership of a share of a company even if it is on a contract basis. There are various advantages or rewards that are associated with stocks. First, stocks provide limited liability especially for passive stockholders. Secondly, unlike Certificates of Deposit, bonds and many other alternatives, stocks have the highest potential to deliver huge gains. Thirdly, majority of stocks are highly liquid meaning that, given a fair price, they can be bought and be sold quickly. Fourthly, investors in stocks can gain benefits through dividends and capital gains (Duarte, 2015). On the other hand, there are also a number of disadvantages or risks associated that are associated with stocks. First, the values of stocks can sometimes change abruptly creating a lot of worries among investors. Secondly, stock prices can sometimes be erratic i.e. they can rise and decline quickly in such a way that can influence investors to make wrong selling decisions. Thirdly, investors may lack sufficient information about the company thereby affecting investment decision making. Fourthly, even if shareholders are considered as company owners, they lack certain privileges as inspecting company books of accounts. Lastly, stockholders are usually last people to be paid after the company settled other payments elsewhere (Duarte, 2015).

Bonds

            Bonds are means by which governments as well as businesses use in order to raise the funds that they need from investors. Bonds are associated with a number of advantages or rewards. First, the interest earned is on bonds usually exempt from income tax of the state. Secondly, they provide safety of periodic and principal interest income (Goldberg, 2014). On the other hand, it is worth noting that bonds are also associated with a number of risks. First, rising interest rates whereby a bond portfolio can be affected due to market price losses especially in an environment where the rates remain on the rise. Secondly, the market volatility of the bond can affect individual bond prices. Lastly, investors can suffer a credit risk.  

Mutual Funds

            These entail a form of investment in which investors collect their resources in a single pool and then invest them in various assets. There are a number of advantages associated with mutual funds such as diversification, professional management, liquidity, economies of scale, and simplicity (Goldberg, 2014). However, there are a number risks associated with mutual funds and they include tax inefficiency, management abuses, poor trade execution, and high sales charges and expense ratios.           

            Mutual funds are a form of investment approaches that can enable individuals to pool their resources in a collective manner in order to buy a collection of bonds, stocks, or other assets that are not easy for individuals to acquire on their own (Slott & Trexler, 2012). An average to small investor can embrace mutual funds as a cost-effective and smart approach to investment. In most cases, some funds can allow individuals purchase shares with an upfront amount of $2,000 and then make monthly payments of at least $50. This approach can be a suitable approach for Sam, all he needs is to raise an upfront amount and then begin making monthly payments depending on his abilities. Through becoming an investor in a mutual fund, Sam will be able to diversify his investments.            

In conclusion, Investing in personal financial planning is a brilliant idea because it helps a person to determine his/her short, medium and long-term financial objectives. There are different types of stocks that can make an appropriate choice for Sam’s investment. They include blue-chip stocks, income stocks and defensive stocks. Mutual funds are a form of investment approaches that can enable individuals to pool their resources in a collective manner in order to buy a collection of bonds, stocks, or other assets that are not easy for individuals to acquire on their own. A mutual fund can be a suitable approach for Sam, all he needs is to raise an upfront amount and then begin making monthly payments depending on his abilities. Through becoming an investor in a mutual fund, Sam will be able to diversify his investments.

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