A couple in their early 30s, Ali and Salma Haek recently inherited $90,000 from a relative. Ali earns a comfortable income as a sales manager for System Analytics, Inc., and Salma does equally well as an attorney with a major law firm

QUESTION

Investing Choices

A couple in their early 30s, Ali and Salma Haek recently inherited $90,000 from a relative. Ali earns a comfortable income as a sales manager for System Analytics, Inc., and Salma does equally well as an attorney with a major law firm. Because they have no children and don’t need the money, they’ve decided to invest all of the inheritance in stocks, bonds, and perhaps even some money market instruments. However, because they’re not very familiar with the market, they turn to you for help.

What kind of investment approach do you think the Haeks should adopt—that is, should they be conservative with their money or aggressive? Explain.
What kind of stocks do you think the Haeks should invest in? How important is current income (i.e., dividends or interest income) to them? Should they be putting any of their money into bonds? Explain.

ANSWER

Investment Approach for Ali and Salma Haek’s Inherited Funds

Introduction

Ali and Salma Haek, a couple in their early 30s, have recently inherited $90,000 and are seeking guidance on how to invest their money wisely. Given their stable incomes and lack of immediate financial needs, the Haeks have the opportunity to pursue an investment approach that aligns with their long-term financial goals. In this essay, we will explore the investment approach the Haeks should adopt, discuss the type of stocks they should consider, and assess the importance of current income and the inclusion of bonds in their investment portfolio.

Investment Approach: Conservative or Aggressive?

Considering Ali and Salma’s financial stability, long-term investment horizon, and lack of immediate financial needs, a balanced and moderate investment approach would be suitable for the Haeks. While they have the potential for higher returns with an aggressive approach, it also carries higher risks. A conservative approach, on the other hand, may limit their growth potential. A balanced approach strikes a middle ground, offering a mix of risk and potential reward.

By adopting a balanced investment approach, the Haeks can diversify their portfolio across different asset classes, such as stocks, bonds, and money market instruments. This approach allows them to manage risk while pursuing reasonable growth potential.

Investing in Stocks

When considering stocks for the Haeks’ investment portfolio, a prudent strategy would be to focus on well-established companies with a history of stable performance, strong fundamentals, and a track record of delivering consistent returns. Blue-chip stocks, which represent shares of large, reputable companies, could be a suitable choice. These companies often have a proven track record, substantial market presence, and the potential for steady growth.

Additionally, Ali and Salma should consider companies operating in sectors aligned with their interests and expertise. Their professional knowledge as a sales manager and attorney could provide valuable insights into industries and companies with growth potential.

Importance of Current Income

Given the Haeks’ comfortable incomes and lack of immediate financial needs, current income in the form of dividends or interest income may be of secondary importance. They have the luxury of focusing on long-term capital appreciation rather than relying solely on immediate income generation.

However, it’s worth considering that dividend-paying stocks can provide a stable income stream and potentially enhance overall returns. Dividends can be reinvested to compound wealth over time or provide periodic cash flows for other purposes.

Inclusion of Bonds in the Portfolio

Bonds can play a significant role in a balanced investment portfolio, providing stability, income, and diversification. Bonds offer fixed interest payments over a specified period, making them relatively less volatile than stocks. Including a portion of their inheritance in high-quality bonds can provide stability to the Haeks’ portfolio, acting as a counterbalance to the potential volatility of stocks.

The selection of bonds should focus on investment-grade corporate bonds or government bonds with low default risk. Bonds with varying maturities can provide flexibility in managing risk and potentially enhance the overall risk-adjusted return of the portfolio.

Conclusion

For Ali and Salma Haek, a balanced investment approach is recommended, considering their stable incomes, long-term investment horizon, and lack of immediate financial needs. This approach allows for diversification across stocks, bonds, and money market instruments, providing a balance between risk and potential reward. The selection of stocks should prioritize well-established companies with stable performance, while bonds can provide stability and income diversification. While current income may not be a primary consideration, dividend-paying stocks can provide additional benefits. With careful consideration and professional guidance, the Haeks can make informed investment decisions to help grow their inherited funds over the long term.