This young lady has saved $ 50,000 since she started her first job 3 years ago. She would like to invest this money in the stock market. How will you advise her?
She should not invest the money in the stock market if she needs to use the cash for other purposes within the next 5 years. Investing in the stock market is best done with money she does not need for at least 5 years or more. The market can be very volatile in the short term and she may be cashing her stocks when the market is in a bear phase, to her detriment.
With the above provision, she can safely invest into stocks (assuming that she has acquired the necessary education or guidance). Here are probably some issues she can consider:
1. Since the market has a good run since 2009 and is at historical high levels, she would need to be careful as she will be investing in a market where the prices of most stocks are probably also too high. She should allocate 50% of her cash to fixed deposits and 50% of her cash into stocks.
2. The money she put into stocks, she can diversify these into 5 to 7 stocks. This will diversify some of the non-systemic risks associated with individual stocks. Her portfolio will still be exposed to the systemic risk of the market, which cannot be avoided.
3. She should select her stocks carefully, using a bottom up approach. Her stock selections will be guided by her investment objectives, investing time horizon, and risk tolerance.
I suppose these 3 simple steps will be an initial plan that she can implement with the help or guidance of her mentor. Hopefully, she has one or will ask for advice from one who is willing.
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