There are numerous advantages to planning for retirement at a young age. According to a new study, persons who have recently entered the labor sector may notice a significant drop in their earnings before the age of forty (Oxlade). As a result, it is prudent to establish a retirement portfolio investing early in order to secure a pleasant retirement. The first portfolio will be a long-term investment, thus liquidity should be kept to a minimum. They intend to invest in the portfolio for about 30 years, and the portfolio will be comprised of stocks with a high risk/high return. At the current economy most people at the age of 25 earn an average income of $39690 and hence allocating 10% of this salary to the retirement investment is a rational decision. This portion of the income yearly will enable the investors to attain the targeted retirement income of $1,000,000 after the 40 years. The target of $1,000,000 was arrived at after a thorough analysis of the economic and social conditions in 40years and the money was satisfactory to provide a comfortable life after retirement. It was also enough for health care since the older you get the more attention to your health needs.
The decision of a saving and investment of 10% of the annually income which results to a monthly investment of $330.75 was arrived at through a series of calculations. First, the difference between the age at retirement (65 years old) and investment age (25 years old) was calculated. Then, the years, which was 40 was multiplied by the number of months in a year. The equation can be written as followed:
(65-25)*12= 480 months. Lastly, the more important information, in order to define the dollar amount that I need to save per month, is my target rate of return. I have decided to target a rate return of 7.5%. I believe this number to be a fair percentage for a retirement plan and believe that the first portfolio will outperform this number due to high risk tolerance of the portfolio. After the series of calculation it will be expected to save and invest $330.75 monthly at an expected rate of return of 7.5% to meet the investment target of $1,000,000 in 40years.
The portfolio chosen will have both international and U.S equity; this will ensure maximum diversification of risk. They investors in this portfolio will be considered risk takers with a very high tolerance of 9 out of 10. The international equity will make up 40% of the portfolio while the rest will comprise of U.S equity. The reason behind this sort of portfolio is the advantage of reduced income taxes.
Exhibit 1.0
Exhibit 1.0 is a brief summary of the different equity classes within their respective categories. There is also an illustration of how much monthly saving is investing in which bond (Ticker Symbol) and how much they will pay per month in fees. Lastly, this table shows the long-term expected return for each fund, which were taken from the Retirement Board of the City and County of San Francisco.
International Equity
We will be looking at every equity class and the reason behind the decision. We will begin with International equity which represent 40% of the overall portfolio. This group consists of 2 funds which comprise of 20% each. The two assets, despite them begin from the same class have different holding strategies (Michael). They are also from different countries.
BEXFX
The first International Equity that they will invest in is a very high-risk fund in the Diversified Emerging Market investing mainly in emerging countries of Asia. The assets constitute 20% of the portfolio. Choosing this fund was a wise investment decision because of its high historical return of 5.62% compared to the FPMAX fund which is copying the MSCI EM IMI benchmark and had a historical rate of return of only 0.5% (Levering). Although this fund has a higher fee of 1.45% it is the 2nd best in this category. Despite its riskiness it is believed to be a very promising investment.
FSIIX
The second asset is a European Foreign Large Blend asset. It was chosen because it is investing in the EAFE and copying the MSCI EAFE benchmark. This fund has done exactly like the benchmark with a super low fee of 0.08% (on a hypothetical $10,000) as well as it has done better than 75% of the 116 fund in that category while being a passive management fund.
US Equity
Next after analyzing the International is the US Equity fund, which constitutes 60% of the portfolio. The reason for choosing this class and in very high proportions (60%) is reliability and stability of these stocks. The first 2 fund are both in the Large Blend category.
FSSVX
My first fund is a Small Blend fund following the famous Russel 2000 benchmark. It is the riskier US Equity fund that will be chosen due to the higher volatility of large number of smaller companies succeeding. Over the last 5 years, it had a return of 11.73% with fee as low as 0.07%.
FUSVX
The second one is investing in the same company as the S&P 500 and had a historical return of 6.85% with only a fee of 0.045%. This passively managed fund has done better than approximately 75% of the 150 fund in this category.
FSCKX
My third fund, the FSCKX, is a new fund in the US Equity Market. It is a Mid Cap Blend that has performed incredibly; it is almost as good as the Russel MidCap benchmark.It is the perfect passive fund with a historical rate of return of 14.37% for 5 years with only 7 basis point in fees.
FSTVX
The FSTVX is a very reputable large blend asset with more than 3300 different countries investing on it. It is the 2nd large blend fund and follows the DJ US Total Stk Mkt benchmark. Its risk properties are average and have a monthly fee of 0.07%. Only 29 out of 150 funds have done better than this fund.
Conclusion
From the exhibit1.0 you can see that the portfolio is expected to outperform the expected return of 7.5% and reach 7.95%. It also expected to incur a minimal monthly fee of $1.13. From the computation this portfolio is very promising and its high risk attribute offers an expected high return. Using various classes of assets also ensures that the risk is well diversified.
Works Cited
Opportunity knows no boundaries. 2017. Retrieved from: http://www.cefa.com
Don't shun equity: A monthly investment of Rs 5,000 could make you a crorepati. Retrieved from:http://economictimes.indiatimes.com/articleshow/54494229.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppsthttp://www.economictimes.com/wealth/investment/why-you-shouldnt-be-scared-to-invest-in-equity/articleshow/54494229.cms
https://www.fidelity.com/fund-screener/research.html
Levering, Jeff. Taking the risk out of mutual funds compliance: a seven step check list for safer, more cost efficient mutual fund sales. Journal of Investment compliance, 9.1(2008): 44-56.Web
Michael, Jones. Startup equity Investment: Understanding startups Investment. 2015. Web. https://www.fundersclub.com/learn/guides/understanding-startup-investments/startup-equity-investments/.
Oxlade, Richard. The basic Investment Plan I would have handed to my 21 year old self: The telegraph.2014. Web. Oct, 25 2014 http://www.telegraph.co.uk/finance/personalfinance/investing/1118504/The-basic-investing-plan.
