Summary and Answer of Questions

Continuing Case 4: Chapter 16, page 562. Submit a short summary of the Continuing Case, list the questions, and your answers to the questions.


Investing in Mutual Funds Jamie Lee and Ross did several weeks’ worth of research trying to choose just the right stock to invest in. After all, the $50,000 inheritance was a lot of money and they wanted to make the most informed investment choices they could. They discovered, by doing their homework, the various companies’ stocks that they were looking to invest in did not seem like they were going to have the promising future that Jamie Lee and Ross were hoping for. They are aware that they are taking a chance with any investment instrument, but they are both nervous about “putting all of their eggs in one basket” and want to be more confident in making their investment choices. But how can they be more assured? They decided to speak to their professional investment adviser, who suggested that investing in mutual funds may be the way to lessen the risk by joining a pool of other investors in a variety, or bundle, of securities chosen by the mutual fund manager. This way, Jamie Lee and Ross can eliminate the pressure of choosing the right company, and they minimize the chances of losing all of their investment money by diversifying their portfolio. A mutual fund sounded like the sensible investment choice for them, but which mutual fund would be tailored to their investment strategy? Jamie Lee and Ross are in their mid-40s and well on their way to reaching their long-term investment goals, as they committed to reaching their objectives early on in their marriage. They set their sights on having the triplets graduate from college debt-free and saving enough to purchase a beach house when they retire. They are looking for a mutual fund that will provide investment income while maintaining the moderate-risk investment path that they are on, as they have some time to go before retirement.
Current Financial Situation Assets (Jamie Lee and Ross combined):
Checking account: $7,500 Savings account: $83,000 (including the $50,000 inheritance) Emergency fund savings account: $45,000 House: $410,000 IRA balance: $78,000 Life insurance cash value: $110,000 Investments (stocks, bonds): $230,000 Car: $18,500 (Jamie Lee) and $24,000 (Ross) Liabilities (Jamie Lee and Ross combined): Mortgage balance: $73,000 Student loan balance: $0 Credit card balance: $0 Car loans: $0 Income: Jamie Lee: $45,000 gross income ($31,500 net income after taxes) Ross: $135,000 gross income ($97,200 net income after taxes) Monthly Expenses: Mortgage: $1,225 Property taxes: $500 Homeowner’s insurance: $300 IRA contribution: $300 Utilities: $250 Food: $600 Gas/maintenance: $275 Entertainment: $300 Life insurance: $375


1.It has been suggested by Jamie Lee and Ross’s professional investment counselor to perform a financial check-up as the first step in investing in mutual funds, even though they are investing $50,000 that was inherited from Ross’s late uncle’s estate. Is it a good time to invest the inheritance, or should Jamie Lee and Ross perform their financial check-up to make sure their budget is balanced?

2. Jamie Lee and Ross have been reading quite a lot about stock funds while researching the classifications of mutual funds. Knowing Jamie Lee and Ross’s stage in life, what different types of stock funds would be recommended for them to invest their $50,000 inheritance in? Why?

3. The investment adviser recommended looking into managed funds, which could help take the burden of the decision making on when to buy and sell off of Jamie Lee and Ross. But Ross was considering index funds, which have a lower management expense. Using your text as a guide, compare managed funds and index funds. Which fund would you recommend for Ross? Why?

4. Jamie Lee and Ross are ready to evaluate a mutual fund more closely. Choose a mutual fund that is available through one of the investment companies mentioned in Exhibit 16-4 or one that has been recommended by a friend or family member and complete Personal Financial Planner Sheet 62, “Mutual Fund Evaluation.” Would you recommend this mutual fund for Jamie Lee and Ross?Why or why not?P(5.u)       

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