Question

Imagine you inherited $100,000 and you want to invest it to meet two financial goals: (a) to save for your child’s (who is currently a high school junior) college education, and (b) to save for your retirement a few decades from now. How would you invest the money for each of these? Give details and explain your answer.

Answer 1

The funds for college education would be required in 5 to 7 years whereas the funds for retirement we assume are needed only after 25 years.

So, college education is a medium term goal that is in 5-7 years and the retirement is a long term goal

For the college education, I would invest in a range of debt and equity instruments. I would balance my approach since I do not want any downside risk after 5 years. So, I would invest 50% in a bond fund that would give stable returns and 50% in equity index fund that would give me stable index returns.

For retirement which is a long term goal I would invest 100% in equity funds. In the 100%, I would invest 40% in small and mid cap funds, 40% in large cap funds and 20% in international emerging market funds which invest in countries like China and India. Since this is a long term goal and I can withstand some amount of volatility.