Question

Having just returned from the war in Afghanistan, David has $25,000 in his savings account. His girlfriend suggests that he talk with an investment advisor and let his money "make more money." David has his eye on a new Ford truck, but realistically he knows that his old Jeep Cherokee will probably last another four years, at which time he will definitely need this money as a down payment on the purchase of something new. He knows he may have other needs as well. David should buy high-growth stock with his funds because even though they are risky, they also have the greatest potential of bringing in a better return on his investment. True False

Answer 1

The correct answer is FALSE.

• First it's not sound investment advice to put all his savings into an investment because as the narrative rightly points out, he may have other needs.
• Second, high growth stock are also

1. high risk
2. they only pay in the long term only if the company is successful because dividends are re-invested which is one of the reasons the companies grow quickly.

Although they are high risk, they also have great advantages such as:

1. High growth rate: this means if all goes well David will enjoy a good return on his investment;
2. It's also a way to protect his money from erosion by inflation

What can David do?

Subject to the advise of a professional investment professional

1. David needs to take into consideration his immediate needs, set aside some funds to take care of that.
2. Invest the balance into a mix of high growth rate stock which are high yielding but risky and low growth rate but secure investment like government bonds.
3. Start a small business by the side or get a job in the interim as he continues with his new life.

Cheers!