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Personal Financial Management

13.1 Ray's Dilemma: Common Stocks or Mutual Funds?
Ray Sutton has worked in the management services division of Strategic Consultants for the past 5 years. He currently earns a n annual salary of about %95,000. At 33, he's still a bachelor and has accumulated about $60,000 in savings over the past few years. He keeps his savings in a money market account, where it earns about 3% interest. Ray wants to get "a bigger bang for his buck" and so has considered withdrawing $50,000 from his money market account and investing it I the stock market. He feels that such an investment can easily earn more than 3%. Cheryl Dodd, a close friend, suggest that he invest in mutual fund shares. Ray has approached you, his broker for advice.

1. Explain to Ray the key reasons for purchasing mutual fund shares.
2. What special fund features might help Ray achieve his investment objectives?
3. What types of mutual funds would you recommend to Ray?
4. What recommendations would you make regarding Ray's dilemma about whether to go into stocks or mutual funds? Explain.

13.2 Jennifer Ponders Mutual Funds
Jennifer Hollins is the director of a major charitable organization in Lexington, KY. A single mother of one young child, she earns what could best be described as a modest income. Because charitable organizations aren't known for their generous retirement programs, Jennifer has decided it would be best for her to do a little investing on her own. She'd like to set up a program to supplement her employer's retirement program and, at the same time, provide some funds for her child's college education (which is still 12 yrs away). Although her income is modest, Jennifer feels that with careful planning she could probably invest about $350 a quarter, and she hopes to increase this amount over time. Jennifer now has about $15,000 in a bank savings account, which she's willing to use to kick off this program. In view of her investment objectives, she isn't interested in taking a lot of risk. Because her knowledge of investment extends no farther than savings accounts, series EE bonds, and a little bit about mutual funds, she approaches you for investment advice.

1. In view of Jennifer's long-term investment goals, do you think mutual funds are an appropriate investment vehicle for her?
2. Do you think she should use her $15,000 savings to start off a mutual fund investment program?
3. What type of mutual fund investment program would you set up for Jennifer? In your answer, discuss they types of funds you'd consider, the investment objectives you'd set, and any investment services (such as withdrawal plans) you'd seek. Would taxes be an important considerations in your investment advice? Explain.
4. Do you think some type of real estate investment would make sense for Jennifer? If so, what type would you suggest? Explain.


Solution Preview

These questions are fairly open-ended, and I am giving you my opinion (by no means the only correct answers). If you have questions or different investment approaches, I am open to discussions at anytime.

Ray's case.

1. Purchasing mutual funds are better than Ray's current investments in the following ways
-it is highly likely that it will generate a return greater than 3%
-does not require the investor to have a lot of finance knowledge (which Ray does not)
-a wide range of choices available to him (with a great variety of returns and risks)
-able to get professional management of his money at a relative reasonable cost (usually 0.2%-2% of investment, this is known as the MER, a 1% MER means that if you invest $100, you will need to pay $1 for someone to manage your money)
-diversification opportunities. Generally, the mutual fund manager buys a lot of different stocks, which will reduce risk. It is impossible for an individual, with limited assets, to purchase many different types of stocks.

2. Generally speaking, mutual funds are evaluated in the following ways.
-does the fund generate return in the form of income such as dividend?
-does the fund generate return through growth?
-what is the expect return and risk of that fund?
-is the fund liquid (i.e. can you sell it anytime, such as open-end funds, or you must wait until a certain time to sell the fund, such as close-end ...

Solution Summary

Personal Financial Management