Josh just started his first professional job two weeks ago and his parents have already started encouraging
Question:
Josh just started his first professional job two weeks ago and his parents have already started encouraging him to start investing. Since he already has a small account open at Vanguard, he decides to give them a call to discuss his options. Help answer Josh's questions about the markets and talk him through different scenarios.
Ticker | Description | Allocation | Historic return | Expense ratio | Standard deviation |
VFIAX | S&P 500 FUND | 50% | 13.62% | 0.04% | 18% |
VSMAX | SMALL CAP FUND | 30% | 11.62% | 0.05% | 23% |
VBTLX | US BOND FUND | 20% | 3.62% | 0.05% | 4% |
YEAR | RETURN |
1 | 11.60% |
2 | -26.20% |
3 | 17.90% |
4 | 7.30% |
YEAR | SELL-RETURN | SELL-VALUE |
0 | $1000 | |
1 | -50% | |
2 | 3% | |
3 | 3% | |
4 | 3% | |
5 | 3% | |
6 | 3% |
Questions
- Josh has a few thousand dollars invested in several mutual funds. Explain to him what those funds are likely to be holding as investments? What are some the major characteristics and differences in investing in individual stocks and mutual funds?
- Say that the VFIAX is trading at $50 at the beginning of the year. What is the range in which we can expect it to finish the year?
- Would you recommend that Josh invest in small market cap shares, as they have a lower historic return and higher risk than large market cap shares? Explain your answer.
- What annual returns can Josh expect from his existing portfolio?
- Lets say Josh invests an additional $1000 today in individual shares. Over the next year, the market drops 50 percent. At the end of year 1, Josh panics and sells all of his individual shares, locking in aloss. After selling his shares at the end of year1, josh then goes and buys treasury bills, which give a guaranteed 3 percent annual return. How much is Josh's portfolio worth at the end of each 0f the 6 years? Record your answer in the table below (round to the nearest dollar).
YEAR | SELL-RETURN | SELL-VALUE |
0 | $1000 | |
1 | -50% | |
2 | 3% | |
3 | 3% | |
4 | 3% | |
5 | 3% | |
6 | 3% |
South-Western Federal Taxation 2018 Comprehensive
ISBN: 9781337386005
41st Edition
Authors: David M. Maloney, William H. Hoffman, Jr., William A. Raabe, James C. Young