Question

WEEK 6 LAB

You have just inherited $100,000 tax-free. You have three options. Invest in a savings account at your local bank at 1% annual return. Invest the S&P 500 with an anticipated return of 12% annual return, though there is always some risk as the past is not always an indication of the future.. Invest in your business with an anticipated return of 24%, but with moderate risk due to the changing business environment. Which option would you pursue and why? Assuming these numbers for annual return are correct, how often will each of these investments double in the next 72 years?

Answer 1

With the inherited amount of $100,000 I have three options. What I will do with thay money depends on the risk apetite of me as an investor. If I am a zero-risk investor, then I will invest all my money in the savings account with just 1% interest but my money being safe. Low to medium risk investor will invest in S&P and high risk invenstor will start his own business for maximum returns.

Taking a rational approach, I would divide my inherited money in three parts and invest in all three options, try to get maximum returns and still be safe. Its called diversification. My chosen ratio would be 25:25:50 (you can chose this ratio as per your choice).

25% that is $25,000 would go in savings account, to be safe if I face bad luck.

25% that is $25,000 would go to S&P 500, to try and get 12% returns, and let the money work for me.

The rest $50,000 I would use to start my won business. I would weigh all the options and ideas to start the new business and would start that business where I am most confident.

Now for the second part, to see how often the money gets double in the next 72 years, there is a rule of 72. The rule states that the amount of time required to double your money can be estimated by dividing 72 by your rate of return.

So for savings account giving 1% return, the time required would be: 72/1 = 72 years

For S&P 500 with returns of 12%, the time would be: 72/12 = 6 Years to get double the money

For own business with return of 24%, the time would be: 72/24 = 3 years to get double the money