Case: SARA DECIDES TO TAKE THE PLUNGE
Sara Thomas is a child psychologist who has built up a thriving practice in her home town of Adelaide. Her practice has been so lucrative, in fact, that over the past several years she has been able to accumulate a substantial sum of money. She has worked long and hard to be successful, but she never imagined anything like this. Fortunately, success has not spoiled Sara. Still single, she keeps to her old circle of friends. One of her closest friends is Terry Jenkins, who happens to be a stockbroker. Sara sees a lot of Terry, who has acted as her financial adviser.
Not long ago, Sara attended a seminar on investing in the sharemarket. Since then she has been doing some reading about the market, and she has concluded that keeping all of her money in low-yielding savings accounts really doesn't make any sense. As a result, Sara has decided to move part of her money to shares. One evening, Sara told Terry about her decision and explained that she had found several shares that she thought looked ‘sort of interesting'. She described them as follows:
• Pacific Swim Suit Company. This highly speculative share pays no dividends. Although the earnings of PSS have been a bit erratic, Sara feels that its growth prospects have never been brighter-‘what with more people than ever going to the beaches the way they are these days', she says.
• Town and Country Computer. This is a long-established computer company that pays a modest dividend yield (of about 2.5%). It is considered a quality growth company. From one of the share reports she read, Sara understands that it offers excellent long-term growth and capital gains potential.
• Southwestern Public Utility Company. This value share pays a nice dividend yield of around 5%. Although it is a solid company, it has limited growth prospects because of its location.
• International Gold Mines Ltd. This share has performed quite well in the past, especially when inflation has become a problem. Sara feels that if it can do so well in inflationary times, it will do even better in a strong economy. Unfortunately, the share has experienced wide price swings in the past and pays almost no dividends.
QUESTIONS
1. What do you think of the idea of Sara keeping ‘substantial sums' of money in savings accounts? Would shares make better investments than savings accounts? Explain.
2. What is your opinion of the four shares Sara has described? Do you think they are suitable for her investment needs? Explain.
3. What kind of share investment program would you recommend for Sara? What investment objectives do you think she should set for herself, and how can shares help her to achieve her goals?