Kristin Decides to Try Her Hand at Investing Your Name Instructor 01/24/2012 The options open to an investor, especially a young investor, that the choice can seem overwhelming to those with no experience in the financial benefits of personal earnings…
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Younger persons also tend not to be responsible for dependents, large assets, and, in many cases of young professionals, their own health coverage. An older person, however, is by his or her nature more risk-adverse, since there is a more limited time span in which to make up potential losses due to investments. Consequently, investing is more confusing for the younger investor like, in this case, Kirstin who is a 26-year-old female potential manager. Although Kirstin has to build for the future by selecting more secure investment options, she should also try to maximize her gains by taking on more risk than the average investor did. This is not to say that Kirstin should become a gambler with her money on the stock market; rather, she should look to expand her capital in a safe, prudent manner. Regardless of an investor’s age or level of risk-aversion, one should always seek diversification as a first principle (Melicher & Norton, 2008, p. 8). Even though Kirstin does not have a large asset pool to pull from in terms of seeking out investments, she ought to seek out holdings in as many asset classes as she can. This means that spreading her assets between equities (blue chip and growth), bonds (corporate and municipal), cash equivalents, and commodities. Spreading assets around to the different classes means that Kirstin is hedging her risk against sharp declines in any of the specific categories, such that the other categories can support her portfolio in tough times. The majority of this portfolio must be concentrated in areas with highest growth potential, but diversifying between these instruments is a good strategy. If Kirsten decides to put most of her savings into blue chip or growth equities, she is likely to see a satisfactory return on her investment if the overall market is bullish or relatively stable. Depending on how long she expects to hold these investments, she may see a return on investment (ROI) at a percentage higher than any percentage offered by a corporate or municipal bond holder, or any cash equivalent offered by her local bank. Assuming that Kirsten’s idea of a “satisfactory return” is greater than the 3 percent interest paid by her bank for a Certificate of Deposit, then she is more likely to see desired returns if she invests in equities as opposed to other kinds of cash equivalents and bonds. Because Kirsten can be certain that her CD with her local bank is insured (that is, she cannot lose the principle amount, like she can with an equity or bond), she must be willing to accept only a return greater than 3 percent. Depending on the nature of the bonds Kirsten investigates, she is likely to find bonds that have greater than 3% interest. Especially corporate bonds of companies with lower credit ratings, which are consequently more risky, Kirsten could find rates of return nearing 10 percent. Kirsten’s decisions about where to put her money could be driven by any number of factors, including but not limited to tips from friends, independent research, consultations with financial planners, developments in the news, or developments in her own personal life (Lim, 2010, p. 19). Most likely, Kirsten will decide what to invest in based on her risk-aversion and the principles of good investing. As already discussed, the principle of diversification may draw her to look at both equities and bonds, in addition to the cash equivalent in which she plans to invest $3,000. In addition, Kirsten
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