Question

Finance is exciting! In this course, we learned how money can grow through the use of compounding and interest rates and your growth strategies may now be different. What are your new financial goals? Would you like to become more liquid, to save more for your retirement, or to start a new business? Whatever your goals, finance is right at the core. Think about what you learned in this course regarding investing to complete this assignment.

Write a two to three (2-3) page paper in which you: Describe (3) ways you will invest in your future based on the principles of finance discussed in this course. Include terminology from the course and use citations as necessary to support your explanation of the terminology. Discuss one of the (3) ways you feel most confident as a way to invest in your future. Explain your level of confidence. Of the (3) ways you will invest in your future, discuss the one you perceive might be the most challenging. Then, discuss how you might overcome some of those challenges.

Answer 1

Finance is interesting as well as useful when planning for one's individual future with regards to investing for the future and then earning returns on them which can sustain our livelihood in the future as well.

For that we need to have an estimation of the amount of cash flows which we would need in the future to sustain ourselves. Based on that cash flow, we can then estimate a discount rate which we can earn without taking undue risks. This then decides our ability to invest in various instruments and earn returns commensurate with our risk appetite.
A methodology would be to analyse historical returns that has been made possible and also calculate the volatility of these returns. By plotting the returns and the volatility, we can then decide on an optimal portfolio combination with regular rebalancing to ensure that our risks is contained.

So the three ways to invest for our future are:-
1) Periodic investment with regular inflows into the investment assets
2) Regular rebalancing based on returns and risk profile
3) Ensure well diversified portfolio with spread across equities, debt and other physical assets

The most confident way to invest would be to investment in a systematic manner for the long term with periodic rebalancing to ensure that the mix of assets in the portfolio remains constant or as per our risk appetite.

The above invest technique is fairly well proven and has shown to generate good returns in the past.

The most challenging investment strategy would be to finalize investment in the physical assets which could be difficult to value and rebalance. So there could be a chance of buying at mispriced levels which could reduce future returns. Also liquidity could be an issue with investment in alternate assets such as gold or real estate.

The way to mitigate these risks are through avoiding any large investment into these asset classes and make investment into these classes of only the minimal quantity which helps in diversification without risking too much capital.