Assignment 2 (Due Week 8): Investing in the Future, Overall Role of Investing in Personal Financial Planning

Investing in the future
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Sam Johnson has created some financial goals for himself. He is 40 years old, currently has a great job, and pays his bills on time. He wants to save enough money to put his children–currently ages 3 and 8, through college. He also wants to retire at the age of 60. He puts $150 a month in a savings account, paying less than 1% in interest. He wants to earn more interest with the money he is saving. In order to do this he needs to learn more about investing.
Overall role of investing in personal financial planning
Investment is important in financial planning since as it helps one to consolidate resources to realize the financial objective. Financial planning requires one to first state the long-term and short term financial goals. A financial plan includes details on investments and liabilities. The financial goals may change depending on the circumstances and an investment portfolio is considered when creating and updating a financial plan (Bodie, Kane & Marcus, 2011). The financial plan is a roadmap to achieve financial goals, with the investments part of the strategies identified to achieve the goals. The investment options undertaken are based on realistic assumptions that the financial plan will be able to meet the long-term goals of retirement planning.
Financial planners/ advisors have knowledge and expertise on various types of investments, and they help to allocate the assets efficiently. To choose the investment options wisely is necessary to meet the financial objectives, given that there should be a mix of bonds, stocks and mutual funds as this spreads risk. The investment option in financial planning is reviewed periodically to determine whether there is a need to reallocate the investments. For instance, the investment may be overweighed in an asset class that is risky, which has potential for good returns but also huge losses.
Investment should fit into financial planning, given that a client’s financial objectives, financial situation and limitations are taken into consideration when choosing specific investments (Bodie, Kane & Marcus, 2011). Additionally, while investing one has to consider the risk profile of the investment, whereby investing should protect against inflation. Good returns are based on the risk and return tradeoff with the investment portfolio chosen to increase value over time. The power of compounding is also considered while investing as it is related to the returns profile and ability to generate the desired returns in the long-term. Attributes of good choice stocks
A company’s earning potential influences the stock price and attractiveness of the stock. The earnings potential is important when choosing a stock, as this boosts the stock dividend payout. For instance, Eaton Company is a diversified power management is an example of a stock that has high growth potential over time. Ideally, the company stocks that are high earning should also not be affected by cash flow problems, since the money distributed to investors is part of the cash flows (Kristof, 2014). The cash flow is available for acquisitions, dividends and stock repurchase. High earnings potential is associated with high income production to investors and growth.
Large well established companies may not to increase sales significantly while their earnings are huge. However, companies with global operations and dominant in their markers will consistently post earnings growth. Even if the growth is modest, there are consistent dividend payments. For instance, the stock of Coca Cola is one that pays dividends constantly, but the earnings growth on an annual basis is mostly between 1 and 10% (Kristof, 2014). The annual dividend rate increases over time, and the stock option has the potential to increase the value of the investments for the next 20 years.
The stocks of profitable companies can be considered when investing in individual stocks as they are more likely to weather a slowdown in specific industries. For instance, the stocks that were less affected during the global financial crisis show the resiliency of the companies. For instance, the stock of Well Fargo is a good bet since the company still maintained profitability, despite the financial industry being hard hit by the financial crisis (Kristof, 2014). A stock should not be chosen in isolation without considering the performance of the industry, competitors and market fundamentals. The ultimate aim is to grow income, but the risk and return payoff should not be ignored while picking the stocks....