Reassessing Risk

Virna Dolmo is learning to invest more aggressively to reach her financial goals

to never have more than 10% (preferably 5%) of her assets in any single company stock. This and the aforementioned adjustments will increase her weighted average expected investment return from 2.2% to 7.7%. Over 20 years, taking what she has now and investing $550 per month (of the $650 she used to put toward I Bonds and her money market account), Dolmo would have accumulated just over a million dollars as opposed to having just under $500,000 if she were to leave her money where it is.

Invest in an educational IRA. Use the $2,000 BE cash prize to start an educational IRA for her nephew. Equally important, she should encourage her entire family to contribute to his college education. Bryant suggests investing in an S&P 500 index fund until he is three years from college then reallocating to a balanced or moderate fund. She can use the remaining $100 of the $650 freed-up monthly cash flow to contribute to the IRA and she should try to get other family members to match this amount.

Start funding the home purchase. Since Dolmo and her sister just signed a two-year lease, she has 18 to 24 months to set aside money for the down payment. The two-family home Dolmo is looking for will probably cost around $400,000, and with Dolmo’s impeccable credit score (almost 800), she will need no more than 10% down, maybe even as little as 5%. Split with her sister, that’s $20,000 each. Dolmo should look to save $10,000 a year or $800 a month until her lease is up. Dolmo usually takes three to four trips per year to the Caribbean and South America; if she cuts back by just one trip, she could make up the shortfall.

Even though Dolmo already has enough cash on hand for a down payment, Bryant recommends deferring the house purchase instead of breaking her lease. The extra time will give Dolmo and her sister the opportunity to learn the home-buying process and the freedom to find a home they both like without feeling pressured. With her excellent credit sco
re, Dolmo doesn’t have to worry about fixed mortgage rates rising. “She has many options at her disposal. For example, she can always get a five-year ARM [adjustable rate mortgage] around 2%, which is long enough to take her through another cycle of rising, then decreasing, rates.” Bryant says this gives Dolmo’s investments a chance to grow.

Financial Snapshot: Virna Dolmo

HOUSEHOLD INCOME

Gross Income $56,000
ASSETS
Checking $1,000
Money Market 47,050
I Bonds 13,400
401(k) 33,050
Total $94,500

LIABILITIES

Credit Card Debt $350
NET WORTH $94,150
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