Economics 12 Portfolio - Investments and Reasoning

Economics 12: Investment Portfolio Assignment

Joe Ma

1. My name is Joe Ma. I am 46 years old, a software developer at Microsoft. I’ve been married for 20 years and have 3 children, and though I have made small investments over the years, this is the first time I have put together a serious portfolio to save for our retirement. From my job, I have saved $35,000, and I recently inherited $65,000 after my father passed away. I have been researching several types of investment and consider myself to be moderately aggressive in investment style, so I am allocating about 40% in low risk investments, 30% in medium risk, and 30% in higher risk investments. Our income easily pays for all of our expenses, and I think it is unlikely that we will need to sell any time soon, so I can tolerate fairly high volatility and focus mostly on long-term growth.
2. Investments and Reasoning

• Stock mutual fund: TD (e-Series) U.S. Index. This fund is based on the S&P 500 Index, which is a common benchmark for equity investments because it follows the whole U.S. stock market. I chose TD e-Series because it had the lowest MER (0.33%); since index funds are not actively managed, paying a higher management fee is a waste of money. I chose an index fund rather than an ETF because there are no fees for buying or selling fund shares. I chose other funds (see below) from TD for their low MERs and for convenience.

• Stock mutual fund: TD (e-Series) Canadian Index. This has the same advantages as the above fund – low MER, long-term performance at least as good as actively managed funds but without the burden of guessing which managed fund will perform best – but it will probably be less volatile since Canadian corporations operate under tighter regulation and have more conservative management.

• Stock mutual fund: TD (e-Series) International Index. The only difference between this and the previous two is the region: this includes corporations in Europe, the Far East, and Australasia, all of which have different prospects for growth. China, for example, is growing rapidly and will likely continue to do so for many years, though there are risks from corruption and political changes. On the other hand, Japan, Korea, and most European countries have stable and mature economies with lower expected growth but also lower risk.

• Stock: Tesla. Stocks are high risk in general, and this one is particularly high risk because it’s a fairly new company and has only recently become profitable. However, I have been following the company’s progress for a while and have confidence in its technology and management.

• Stock: Google. Google now has the same kind of almost-monopoly power that Microsoft used to have back when I joined the company. Their revenue from advertising will probably continue to grow since they are the default search engine for just about everyone. Their Android platform for phones seems likely to become dominant in the near future, and they have many products planned or just released that seem likely to grow in value.

• Stock: Microsoft. Although Microsoft stock has been stagnant for years, its revenues and profits have continued to grow, so I think a correction in the stock price is due. We have continued to invest heavily in R&D, our Xbox is dominant, and I think we’ll be able to regain market share from Google and other companies in several areas.

• Real Estate: down payment on a cabin in Birch Bay, Washington. For the foreseeable future, this investment will not pay off financially (unless we choose to rent it out), but over the next decade or two it should rise in value significantly because the population in the Lower Mainland will continue to grow and comparable vacation properties are not available here. Agents I have spoken to have seen many more Canadian buyers over the last several years and expect that trend to continue. In the meantime, we will use it for weekends, vacations, shopping, etc.

• Bond: Canada Savings Bond. This has the least risk (the federal government has never defaulted on bonds) and probably the least return of all the planned investments. Although the interest is only 6% on this 10-year bond, at least I am assured of earning it when the bond matures. The only risk is inflation, which I am guessing will be much less than 6% over that time.

• Commodity: Copper. Investing in copper fits into my strategy as one of my low risk investments. As the economies of China and India have grown and become more industrialized, the demand for copper has steadily risen. There hasn't been a discovery of large new reserves of copper in many decades, so the supply will become more restricted in the future, ensuring growth in its value.

•  Precious metal: Gold is a relatively low-risk investment in that it is a rare and unique metal that will always be in demand. Its price rose dramatically over the past several years, but has fallen again recently, making this a good time to get it at a reasonable price. In the long term, I expect its value to continue to rise.