Question

In: Finance

On Monday, November 11, a financial advisor pitches you an investment opportunity for 10 years at...

On Monday, November 11, a financial advisor pitches you an investment opportunity for 10 years at a guaranteed 5% rate of return. You have until Friday to decide whether to invest or turn the offer down. What is your decision? Do you have any concerns? You must support your answer.

Solutions

Expert Solution

The decision depends upon the risk appetite of the investor.
If changes from person to person depending upon the circumstances (of personal nature).

Personally, my decision would not invest in such an investment opportunity (asset).

The ten years is a very long time. Even if the investor invests in the passive fund like Index fund(S&P500) on an average, depending upon the past trend, he can earn more then 5%. Although it's not a guarantee but there is a certain level of confidence.  

The Investor can diversify his portfolio in different Index funds, Real estates and Gold.
So that the risk decreases.

The investor can also look to invest in foreign markets like India. The Nifty Index Fund has an average return of more than 12% in 10 years, with a greater level of Confidence.
Taking factors like foreign exchange into consideration it will still be more than 5% in local currency.

My concern: The 5% Interest rate is too less for a general Investor.


Note: I believe in term guaranteed here as it's just 5% and consider it risk-free.


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