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Investment approach

Investing Page 1

Basing investment decisions on articles in magazines or other media is not a sound

Investment approach.  Often times these media sources have a vested interest in the stock

they are recommending and want people to buy it so the stock’s price will go up.  Cliff should only use unbiased sources, such as Investor’s Business Daily, to obtain information about companies that might be good investments.  Only after a thorough research of a company’s fundamentals should Cliff consider buying stock in a particular company.  He would want to invest in companies showing increasing earnings and revenue over at least the last four quarters.  He would also want to see the company’s return on equity at 17% or greater.  If a company has good fundamentals, then Cliff would need to do a technical analysis of the stock’s price movement to determine the right buy point for the stock. 

If Cliff does not want to put in the time to learn how to invest in stocks, then he should buy mutual funds.  Mutual funds are good investment vehicles for people who have long-term horizons.  The strategy for mutual funds investment is to buy and hold and to do dollar cost averaging whereby Cliff would

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add a certain dollar amount to his mutual funds every month.  This is a proven strategy for investing in mutual funds.  Market timing is a dangerous investment strategy that rarely works.  Using a buy and hold and dollar cost averaging strategy with mutual funds enables an investor to by more shares when the markets are down and thus reap higher returns when the market goes up as it always will.  There is no age given for Cliff so I will assume that he is in his late twenties or early thirties.  That means his time horizon is at thirty years.  Given this long time

Investing Page 2

horizon Cliff should invest in a good growth equity mutual fund and a good bond mutual fund at an 80/20 split.  My recommendation is the Cliff invests in Vanguard Mutual Funds.  Vanguard has many good funds their expense ration is typically lower than other mutual funds.  Their funds are also no load funds, which mean there is no up front fee to buy them.  There are four Vanguard funds I would recommend for Cliff: Prime Money Market (VMMXX), Total Bond Market Index (VBIIX), U.S. Growth (VWUSX) and Emerging Markets Stock Index (VEIEX).

Cliff has $90,000 to invest.  He has indicated that he plans to marry within three years and the wedding and honeymoon will cost him $20,000.  Since Cliff will need this money within a few years he should invest it in the Prime Money Market fund that has less risk than the other funds.  For the balance of $70,000, Cliff should put 60% into the U.S. growth fund and 20% into the Emerging Markets Stock Index.  These constitute the equity funds Cliff will invest in and give him exposure to both U.S. and international equities.  The remaining 20% should be invested in the Total Bond Market Index to give Cliff exposure to bonds and reduce his total risk.  Cliff should take $5,000 of the $70,000 and immediately invest it a Roth IRA using the percentages for the equity and bond funds given.  Cliff should then determine a monthly savings amount and deposit that into his brokerage account holding the mutual funds.  At the first of every year Cliff should first fund his Roth IRA to the maximum allowable before he invests into his regular brokerage accounts holding his mutual funds.

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