Chapter 16, Problem 3CC

Summary Introduction

Case summary:

J and R did research for a long time to select the right stock to invest in because they have received the inheritance money of $50,000. After research they find out that, the stock they are thinking about may not have a much of a future. They know they are taking a risk with instrument so they want to diversify their portfolio as well. In the end, they decided to talk with their financial planner. He told them that they should invest in a mutual fund as they will get their money managed by professional as well they will get their money invested in diversified portfolio as well. J and R are in their in the mid 40s and are in their way to achieve their investment goals. They want to achieve their investment goals early in the stage, they wants that their triplets graduate with no debt burden and want to purchase a beach house. So, they want to invest in a fund which will give them regular income as well as have moderate risk.

Character in this case: J and R.

Adequate information:
Checking account: $7,500
Savings account: $83,000 (including the $50,000 inheritance)
Emergency fund savings account: $45,000
House: $410,000
IRA balance: $78,000
Life insurance cash value: $110,000
Investments (stocks, bonds): $230,000
Car: $18,500 (J) and $24,000 (R)
Mortgage balance: $73,000
Student loan balance: $0
Credit card balance: $0
Car loans: $0
J: $45,000 gross income ($31,500 net income after taxes)
R: $135,000 gross income ($97,200 net income after taxes)
Mortgage: $1,225
Property taxes: $500
Homeowner’s insurance: $300
IRA contribution: $300
Utilities: $250
Food: $600
Gas/maintenance: $275
Entertainment: $300
Life insurance: $375

To determine: Comparison between managed and index fund and whether they need to choose managed or index fund.