Graduating with Investments

Q. I’m currently a 21 year old senior at ****. Upon graduation **** offers all graduating seniors a $25,000 loan at a fixed interest rate of 1%. The payback period is 60 months (5 years). We will receive the loan no later than April 28, 2005, and the first payment is not due until December 21, 2005 (8 months after getting the loan). I calculate that starting in December I will owe $427.34 a month for 60 months totaling $25,640.40. There are no stipulations or fine print. My father and I agree that this is free money and I should accept the loan and invest it. I do not need the money for anything, and I also have finances of my own to pay off the loan if a long term investment seems optimal. My question is: What is your suggestion for investment with such a loan?

Very Respectfully,

Edward

A. It really depends on your tolerance for risk. There are some well managed equity mutual funds that you could use that should have a pretty good average over the 5 years. The risk is that there could be a negative return in the short-term. The odds are in your favor, though. There have only been one or two 5 year periods since the 70's in which the market didn't provide a positive return.

A no risk option would be to buy a 5 yr bond or CD. You cold lock in about 4% per year and have no risk whatsoever.

Lastly, you could split the money between the two.

One mutual fund family that has done a good job lately is Hotchkis & Wiley. I don't know if they are a commission-based fund or not because my clients get in without a commission. If you can't find a good non-commission option, let me know and I will try to help you out.

Congratulations on graduation and thank you for your dedication to our country!

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