The decision to invest in a given asset or combination of assets is essential in enabling an individual to maximize wealth generation in future. However, a rational investor should come up with an investment plan to arrive at an optimal investment decision. The importance of having an investment plan is that it acts as a blue print that an investor uses in determining the right combination of assets to acquire (Damodaran, 2011). The investment plan follows the investment objectives and targets that the investor intends to realize in the future when selecting a portfolio of investment assets and options.

An investor using an investment plan has the advantage of avoiding investment decisions that are not informed by the intended objectives and investment targets. Through an investment plan, an investor is capable of creating a balanced that is capable of meeting the desired long-term and the short-term financial goals of the investment. Accordingly, a retirement investment plan for the 28 years old Kathy has been prepared to determine the optimal investment strategy that she should consider undertaking.

One of the aspects that Kathy should consider when developing the investment plan is enrolling in the 401k plan being offered by her employer. The rationale behind the recommendation to enroll under the 401k plan is due to the benefits it affords Kathy in her retirement investment plan. The enrollment in the 401k plan has the benefit of allowing Kathy to enjoy a significant tax break (Ross, Westerfield, & Jordan, 2009). The pre-tax contribution under the 401k plan has the advantage of reducing the tax bill that Kathy has been incurring as per her taxable income. The lower tax expense means that the actual disposable income that Kathy will be realizing will be higher than her current income receipts (Brigham & Houston, 2016). Kathy should therefore enroll in the 401k plan because it offers a defined retirement saving plan while reducing her tax expenses.

The other investment strategy that has been proposed for Kathy is to take a combination of bond and stock assets in the investment portfolio. The rationale behind the recommendation to mix the bonds and the stocks in the investment portfolio is to take the advantage of investment diversification. The diversification of the investment assets has the effect of ensuring that the risk is spread across different assets, which is essential in cushioning Kathy from the potential of suffering losses if one set of investment assets is experiencing declining returns because the other set of investment assets will counter the declining returns (Brigham & Houston, 2016). Also, the type of the stocks and bonds that should be considered by Kathy is an essential aspect in the investment plan.

At the current age of 28 years, Kathy should consider investing in long-term bonds. Assuming that Kathy will retire at the age of 62 years, that is the earliest time one can receive the retirement benefits, it implies the retirement investment plan should be matched with a time length of thirty-four years. Accordingly, the least time length of the bond investment that matches with the retirement financial needs is thirty years. This observation implies that Kathy should consider selecting long-term bonds for her retirement financial benefits (Damodaran, 2011). Also, the selection of the appropriate type of stocks meeting the retirement financial needs of Kathy is another critical consideration. It is recommended for Kathy to consider investing in the value stocks over the growth stocks in her retirement investment portfolio.

The growth stocks are experiencing continuous growth above the relative market average rate. In contrast, the value stocks are the stocks that are currently undervalued due to their low fundamentals such as earnings, sales and dividends (Ross, Westerfield, & Jordan, 2009). The rationale behind the proposal to include the value stocks in the investment portfolio instead of the growth stocks is because of the expected increment of the stock price in the long-term, which will generate high capital gains to Kathy by the retirement age. The value stocks have a higher potential of experiencing superior price increment compared to the growth stocks since they are presently undervalued (Ross, Westerfield, & Jordan, 2009). Kathy will enjoy significant capital gains by investing in value stocks currently.

While undertaking the above investment recommendations, Kathy should be aware of inherent risks that have the potential of hurting her future investment returns. The potential risks that are likely to be faced are fluctuation of interest rates and unfavorable fluctuation of the stock prices (Damodaran, 2011). The fluctuation of the interest rates has the potential of causing the value of the bonds to deteriorate as Kathy approaches retirement age, which will hurt the expected returns. Equally, unfavorable fluctuation of the stock prices in future has the possibility of exposing Kathy to capital losses (Brigham & Houston, 2016). Accordingly, it is recommended for Kathy to hedge the bonds to avoid selling the bond at a price that is lower than the projected future price. Similarly, the risk of stock price fluctuation can be minimized by diversifying the stocks from companies operating in different industries and markets (Brigham & Houston, 2016). This approach will ensure that a drop in a given set of stocks is cushioned by the stock increment in the rest of the stocks.

An investment and retirement plan is essential in enhancing the ability of an investor to make an informed investment decision. The use of the investment plan helps an individual in determining the optimal investment assets that should be considered in the investment portfolio based on the financial needs. The retirement investment plan that has been proposed for Kathy is essential in enabling her to select the right investment assets to meet her future retirement needs. The retirement investment that has been proposed has considered the current age of Kathy in determining the appropriate selection of the bonds and stocks that should be included in the investment portfolio. Kathy should consider following the recommendation offered in her investment portfolio construction.