Investing money for the future is one of the key components of creating a secure future, and retirement. While many Americans do not plan for future years, other then a company retirement plan and social security retirement benefits, research shows that when a person takes an active role in their retirement planning, they are more likely to create a future which will support their standard of living after they have stopped punching a clock, and commuting to the office.
Regarding the Social Security administration and the SSI benefit program, at its inception during the 1930's the system was based on one beneficiary receiving payments from over 20 contributors. As the population shifted toward longer lives, current estimates are that one beneficiary is receiving payments based on 8 workers paying into the system. In the near future, as the baby boom generation retires and Gen X and Gen Y workers are paying into the system, estimated demonstrate that one beneficiary will be supported by 2 to 3 workers paying into the system. "After the release of the 1989 Trustees Report, at least one authority declared that the picture on Social Security's financial health was a rosy one for the elderly, but a dim one for the young." (Robertson, 1990)
During recent political campaigns, discussion was bantered about regarding a 'lock box' for social security trust fund payments. Unfortunately, the government disregarded this suggestion as it has for generations. The social security trust fund does not exist as a trust fund. It is composed of government issued IOU's the beneficiaries, and the money is being taken not from reserves which have been paid in, and saves, but rather from the current payees. This shell game has put the social security system in jeopardy, thus increasing the importance of individual, personal retirement accounts.
Recognizing that the private citizen is more often able to do a better job at saving money than the government, during the Reagan administration, many retirement laws were changed, and new retirement vehicles created. The U.S. worker was thus encouraged to pursue self-funding his or her retirement. IRA accounts, Roth IRA accounts, Keogh, and 401K investment vehicles are just a few of the creative and effective means to plan for the future.
Risk, Reward, Risk Tolerance, their effects on the Time to Retirement
Investing for the future, and the investment vehicle chosen to fund a happy retirement, are dependant greatly on the attitude and risk tolerance of the investor. The individual investment should reflect the personal comfort level, and the investment goals of the individual investor. The following chart represents the risk to potential reward curve. In the investment market, the greater the risk, the greater the potential reward.
The integer rankings on this graph do not have any specific monetary value, nor is the risk to reward potential line necessarily a smooth sloped line. This representation is drawn to demonstrate one of the most important aspects of investing. When an investment has a higher risk factor, when it is more speculative in nature, the potential for return is greater than an investment which has a lower potential risk. The same relationship is true regarding risk of loss. The higher the level of risk in any investment, the potential is greater the investor to suffer an unexpected loss. For this reason, each investor must determine two important aspects before entering the investment market place.
An investor must know if he if is investing fro long-term, or for short-term gains. Is the time which the investor is going to need the money a short number of years into the future, or is the event horizon farther away? Knowing this helps determine 'risk tolerance' which the investor can safely accept.
The investor must decide if he of she is comfortable with the idea that the invested money could loose value over time. This is a personal preference which operates within the scope of the investment event horizon. The person likely has their own personal 'risk tolerance,' and should select investment vehicles which will allow him or her to be confident about their investment, rather than worrisome. (Bernstein and Clarfeld, 1997)
For this investment portfolio, the investment event horizon is a longer time into the future. I am a younger worker with a good present earning potential. My objectives are for long-term growth which will create a significant value for retirement in the future. For these reasons, I can withstand the risk of an investment portfolio which appreciated and depreciates in value on the short-term basis. My goal is to have a significant accumulation of wealthy 25 to 30 years into the future when I choose to retire.
Diversity as a minimization of risk.
In order to further reduce the threat of significant loss, a strategy of diversification is used. Different sectors on the market trade in groups. For example, if a recession affected the stock producing sector of the U.S. economy, all the stocks of companies which produce, buy and sell stock would be similarly affected. In the aftermath of 9-11, the companies which were not present in the trade towers but were still affected by the tragedy were insurance companies. These companies suffered a significant loss in value in the months immediately after the crisis as a group. Similarly, when the techno-boom of 1998 and 1999 suddenly ended, the support for tech stocks across the entire NASDAQ exchange dropped out from under them, and the entire exchange dropped nearly 3000 points over the course of a few quarters.
In order to protect the individual investor from significant losses of these kinds, an investor should select stocks in different industries. When one stock is adversely affected, then the other will likely not be affected in the same manner, to the same extent. (Bolten 2000)
For these reasons my investment portfolio is selected from the following stocks.
Home Depot (HD) - retail hard goods sector, also affected by the housing market. Home depot is one of the strongest national retailers in this category. Because it is a retailer, rather than a home mortgage or construction company, Home Depot benefits from surges in the new hosing market, and still does well when housing starts are down, and the remodelors are active in existing homes.
Sysco (SYY) - A provider of food and beverage products to the hospitality industry, Sysco is strongly positions in an economy which places a high value on entertainment and travel.
Dupont (DD) - Dupont is primarily a science company. When founded in 1802, Dupont was primarily an explosives company. One hundred years ago, the company turned their focus to chemicals, materials and energy. Today, Dupont delivers science-based solutions that make real differences in people's lives around the world in areas such as food and nutrition, health care, apparel, safety and security, construction, electronics and transportation. (www.dupont.com)
American Express (AXP) - American Express financial services and investment services is a world leader of financial services. American Express has been a solid and stable member of the financial service community.
Sunoco (Sun) - Sunoco, Inc., the U.S. based manufacturer of petroleum and petrochemical products, has approximately 3,900 Sunoco retail gas outlets in 18 states and operates worldwide. (Sunoco.com)
My investment portfolio is composed of these 5 stocks. During the course of the 5-week investment period, $100,000.00 was invested equally in these 5 stocks in order to create a significant basis for my portfolio. The following pages will contain a review of these 5 stocks in terms of my personal investment objectives, and a financial review of these stocks based on the Value Line stock review service. These reviews will focus on the arriving at a determination of the 2 important factors listed above. 1) Do these stocks meet my financial objectives, 2) are they good picks in light of my personal financial preferences.
The Value line review service indicators which will be considered as these stocks are reviewed are the following. Before discussing the individual ranking indicators and the individual stocks, one last point about investment ranking services and projections must be made. All past information is historical data. The future information, which is the purpose of stock review information, is based on the best estimate of where the stock will travel in the next 1, 3, and 5 years. While this information is measured and determined as best as can be with modern investment analysis, the future of a stock is not cast in stone. Stocks will travel up and down, they will match the expectations, or they may beat the expectations, or they may fail to attain the projected levels. All financial data is built around one purpose - to give the investor an idea of where the stock will go based on where it has been. In order to make these projections, the following indicators will be used from the Value line stock review service.
Value Line ranks stocks by their expected price performance relative to the other 1,700 stocks Value Line follows, over the…