Question

A 30-year old teacher with $100,000 dollars to invest has approached you. The teacher is married and has two children who are five years and seven years old. Please share the specific advice you would give to the teacher in terms of investment assets (types of mutual funds, bonds etc....) and allocations to be chosen.

Answer 1

Time horizon - The time horizon is quite long as the teacher is relatively young. This increases the teacher's ability to bear risk.

Liquidity - The children's college fee may be have to be paid when they are ready to go to college. There is at least 11 years before the older child starts college.

The teacher's long time horizon means that the risk tolerance is above average. Therefore, the teacher should focus on increasing the rate of return so that she can accumulate a higher amount with the effect of compounding. At the same time, there should be enough funds to send the children to college. The risk taken should not be so high that there are signifcant losses in the long term. Therefore, the following asset allocation is recommended :

• Invest 40% of the portfolio in bonds. Out of these, around half should be in risk-free bonds, and the other half in high-quality corporate bonds
• Invest 60% of the portfolio in equities. In the equity portion of the portfolio, 60% should be in quality large-cap mututal funds, or index funds; 20% should be in mid-cap stocks or mid-cap index funds; 20% should be international equities, or international equity index funds