Question

The Chan family composed of the parents (aged 40 and 42) and two children (Tom and Mary, aged 18 and 16 respectively), they have four goals that they would like to achieve:

1. To have the children (Tom and Mary) to receive university education in US
2. To accumulate enough for a luxury cruise trip in around 10 years
3. Save enough for retirement in 20-22 years.

And he is considering invest in

1. Small Cap Stocks
2. Blue Chips (Stocks)
3. Long dated High yield bonds
4. A 5 year investment grade bonds
5. Short term investment grade bond fund
6. Money market fund

If they would like to pick one investment for money invested for one goal, which investment you will suggest them to invest for each goal (i.e. Goal 1, 2 and 3) and why.

Answer 1

Goal 1: Children education

Since their children are 18 and 16 respectively so very soon, they would be going for colleges so it is better to put money for that short-term in money market funds. Money market funds provide good returns for short period of time along with the safety of principal. It would be a good idea to put money in the money market funds for that short period.

Goal 2: Luxury cruise trip in around 10 years

Since you have some time period before which you take out your investment, it would be good to put money in the small cap stocks. Here you can afford to take little risk and small cap stock gives good return if you hold it for few years and the economy is doing good the small cap stocks can beat the return generated by the large cap stocks.

Goal 3: retirement fund

Here since you would like your capital to be safe, you should choose the large cap stocks or blue-chip stocks, they provide goods returns, your capital erosion probability is low and they also give dividend so it will provide a stable source of income.