Essay Title: 

Personal Finance Concepts

April 1, 2016 | Author: | Posted in accounting, mathematics and economics

The first of business was to come up with all factors that affect my investment decisions . I am currently less than 30 years old and I have a long investment horizon ahead of me , so time is on my side (Rediff .com 2004 . If my investments fail , I still have many years of earning ability to make up for any potential losses should I incur any I am unmarried and I have no siblings . My parents are wealthy so I would prefer focus all investment decisions to satisfy my own objectives . When it comes [banner_entry_middle]

to selecting investments , I can include investment products like the 30-Year T-Bond , which according to the Bond Market Association (BMA 2001 ) requires a minimum investment of just 1 ,000 . I am currently in accumulation phase in my life as an investor , wherein my investment decisions are characterized by an aggressive desire to secure more funds in less time (Osterman 2004 . My goals are to purchase a car , a home and provide for the schooling of 2 kids . My ultimate goal is to provide enough investments to help shore up my pension upon retirement . Most of my goals are between 5 to 10 years with the exception of a retirement fund which I do not expect to need until after some 25 years

The next step in constructing my portfolio of investments is to come up with a strategy that suits my needs . With all these factors in mind , I took the Vanguard questionnaire to determine my suggested asset allocation . The result was that I should invest 20 of my holdings in bonds and 80 in equity which translates to 20 ,000 in bonds and 80 ,000 in stocks but refrain from cash holdings to meet my objectives

I wanted to select about 20 stocks to reduce systematic risk or risk that can be diversified away (Investorwords .com 2006 . In researching the appropriate number of stocks for a diversified portfolio , I encountered a study which concluded that the old maxim of maintaining 15 or so stocks was enough is now but a myth (Bernstein 2000 . According to Bernstein , Malkiel conducted a more updated research into diversity and found that stock prices are becoming more volatile and the correlation between stocks was decreasing , where correlation refers to the relationship of stock returns with the other . The study found that due to these factors , even more stocks are required in to achieve a diversified portfolio

Given the finding of the research , 50 stocks might not even be enough to diversify away a reasonable amount of systematic risk according to Bernstein . It was then decided to purchase instead purely mutual funds that shared my investment strategy . My reasoning is that mutual funds are diversified portfolios in themselves , actively managed by a team of experts that would do more than I could potentially do as an individual investor . This is not to suggest that mutual funds are run by people with an uncanny ability to unerringly predict market movements… [banner_entry_footer]


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