Planning for Retirement
Financial planning is an effective mechanism of personal decision making. The current work highlights the major aspects of investment and provides recommendations to increase the effectiveness of investment decisions as related to retirement. The paper includes a brief discussion of investment, followed by the description of its risks and potential returns. Differences between preferred and common stock are delineated. Three different stock options are proposed, the description of three main attributes accompanying them. The rewards and risks of investing in stocks, bonds, and mutual funds are discussed. Special recommendations are provided in relation to mutual funds. Implications for investment are discussed.
Keywords: planning, financial, investment, stocks, bonds, mutual funds, returns.
Planning for Retirement
Financial planning has become an inseparable element of personal decision making. Despite the growing number of financial professionals, most individuals want to make independent decisions regarding their finances. As the global financial crisis continues to persist, the quality of such decisions becomes the most essential factor of everybody's wellbeing. Today, the working population wants to ensure that its savings will bring additional value and minimize the risks of poverty and losses in a long-term perspective.
The case of Sam Johnson is just one of the many examples of how a person without any economic or financial background sets goals and develops plans to achieve them. The purpose of the present assignment is to consider all major and minor aspects of investment as a financial planning process and develop recommendations to assist Sam Johnson in meeting his financial objectives for retirement.
Investment is a popular trend in today's personal financial planning. Like Sam Johnson, thousands of men and women seek to increase their revenues while minimizing the risks of losses. In this sense, investment becomes a viable alternative to traditional savings. The importance of investment in personal financial planning can hardly be overestimated. It enables investors to meet their most challenging personal financial goals. Investment enables a person to generate the greatest benefit from his/her savings.
Certainly, choosing an optimal investment portfolio is not a one-time event. The structure of a particular investment portfolio always depends upon the unique financial goals set by an investor and the risks he/she is eager to face in return for higher profits.
Any investment must bring returns. However, in any investment, risk and returns go hand in hand. When setting a measurable financial goal, he should be ready to balance the highest possible after-tax investment returns with the lowest possible investment risks (Reavis, 2014). He should also decide whether he is a risk taker or a risk adverse investor (Reavis, 2014). As a conservative individual, he is more likely to reconcile with lower investment returns if they guarantee minimal risks of asset losses. Such risks can be of various nature, including financial risks, purchasing power risks, market and interest rate risks (Reavis, 2014). All these risks need to be considered, before Sam Johnson can select the best investment targets.
Based on Sam Johnson's profile and the results of the Internet research, the best the man can do is opting for stability that guarantees reasonable but low-risk returns. He does not need to be a finance professional to make good money on stocks. Srivinas (2014) writes that finance professionals are more likely to face investment losses compared with professionals in technology and advertising. Therefore, Sam has all chances to develop a low-risk investment portfolio according to the financial goals he sets for himself. Yet, before the investment process is launched, the man should learn the difference between preferred and common stock.
The former carries much similarity to bonds, but its distinctive feature is that the value of dividends is fixed and paid before common stock dividends (Besley & Brigham, 2011). One of the advantages of such stocks is that, in case of bankruptcy, Sam will have a preferred right to claim the dividends against common stockholders (Besley & Brigham, 2011). By contrast, common stocks do not impose any obligation on the firm to pay dividends (Besley & Brigham, 2011). If the company refuses to pay dividends, the only source of revenue for Sam will be a positive change in the stock's market value (Besley & Brigham, 2011). If Sam is looking for relative stability and wants to secure himself from any major losses, the following stock options could become the basis for his investment portfolio.
First, technology company stocks have proved to be an attractive investment target. As the technology market continues to grow, these stocks display three important attributes: increased value, tangible dividends, and minimal risks of losses. Second, special attention needs to be paid to the stocks issued by the companies in the health and sustainability markets. Such stocks display an enormous growth potential; they pay stable dividends; and these dividends are higher than those of other companies. Third, extremely promising are the stocks offered by oil and gas companies. They promise: (1) steady dividends; (2) stable growth; and (3) minimal risks of asset losses due to the long-term stability in the oil and gas market (Schifrin, 2014). The current stock markets are rich in investment opportunities, and it will take a long time for Sam to explore the attributes of each stock. However, stocks are not the only investment target for Sam. He should also consider the risks and rewards inherent in stock, bond, and mutual fund investments.
Stocks exemplify a company's stake, which means that every stockholder owns some part of the firm. This, however, does not mean that a single stock can give its owner a voice in the company's decisions. What it gives is the right to make a claim on the company's earnings (CNN Money, 2013). Stocks promise considerable rewards but also incur tangible risks. One of the greatest benefits of stocks is that they have always been a reliable instrument of earning long-term revenues. Large stocks return up to 10 percent per year (CNN Money, 2013). As a result, they are best suited to minimize the risks of asset losses due to inflation (CNN Money, 2013). Any investment portfolio must necessarily include stocks. As for the short-term perspective, stocks are riskier than cash or bonds (CNN Money, 2013). However, Sam is not going to spend his revenues within the next few years, nor is he planning to invest large sums of money in stocks. Consequently, he has all chances to minimize short-term risks and maximize his long-term gains.
Unlike stocks, bonds are issued to assist firms in financing their daily operations or challenging projects (CNN Money, 2013). By purchasing a bond, Sam lends some of his money to the company with the hope that he will receive it back with a small interest. Bonds never result in high returns, but stability is their most prominent advantage. Moreover, Sam will receive his interest regularly and without delays. He should know that U.S. treasury bonds represent one of the safest and most secure methods of long-term investment. Also, some bonds provide tax-free returns (CNN Money, 2013). Unfortunately, the credit and inflation risks associated with bond investments cannot be ignored. Because most bond payments are fixed, Sam Johnson will not be secured from the asset losses caused by inflation. Moreover, a company that issues bonds may fail to provide timely payments to bond holders (CNN Money, 2013). Therefore, a decision to invest in bonds should be thorough and well-weighed, as thorough as the decision to invest in mutual funds.
Mutual funds represent the third investment option for Sam. When "stock game might not suit your risk profile, you may want to look for an alternative that can give comparatively good reward but with much lower risk than stock" (Martinez, 2013, p. 12). According to Martinez (2013), a mutual fund is an investment mechanism, when several investors bring their money together to create a pool of financial resources that meets their financial objectives. Mutual funds offer numerous rewards to their investors. Basically, the greatest benefit of investing in a mutual fund is diversification (CNN Money, 2013). It becomes particularly feasible, when an investor does not have enough money to invest in stocks or bonds (CNN Money, 2013). By using mutual funds, Sam Johnson can redistribute his limited financial resources across a broad spectrum of investment targets to minimize the risks of asset losses. The procedure will save his time and money.
However, the process of investing in mutual funds can be costly. Such expenses have direct impacts on the amount of returns Sam Johnson will receive for his investments (Martinez, 2013). These normally include an Investment Advisory fee, an Administrative fee, and a Distribution fee (Martinez, 2013). At the same time, most mutual funds have no insurance or financial guarantees from any government agency, even though they fall under government regulation. Sam Johnson will need to have a minimum of $300 to invest in a mutual fund. Still, his financial profile implies that mutual funds can become one of the most relevant investment options for him.
Mutual funds can be used for a variety of purposes. The principal ones include but are not limited to college plans, retirement plans, and savings accounts. One of the key reasons why Sam Johnson should consider investing in a mutual fund is because he does not have any financial knowledge to make grounded financial decisions. The fees he pays for investing in a mutual fund will link him to the fund managers and financial professionals, who will guide his investment allocation decisions. By investing in a mutual fund, Sam Johnson will release himself from the need to monitor his investments and make daily investment decisions. Finally, as a conservative person, the man will minimize the risks of asset losses associated with stocks and bonds. Still, he should not focus on mutual funds only, and his investment portfolio should include a diversity of mechanisms to generate the highest returns.
To conclude, investments are an important aspect of personal financial planning. Anyone can create an investment portfolio to earn revenues and generate returns. Sam Johnson has all chances to diversity his investment targets, if he considers the advantages and risks of investing in stocks, bonds, and mutual funds. Overall, mutual funds represent the most promising option for Sam, who has little financial knowledge and wants to minimize the risks of asset losses. However, mutual funds alone will never suffice to create a solid investment portfolio, which must incorporate a diversity of instruments to guarantee higher returns.