Scribd
Upload
21 views3 pages

Investment Profiles and Strategies Analysis

William Elam has inherited $750,000 and seeks investment advice to maintain his family's financial stability and plan for future expenses like college and retirement. Bonnie DuBois, a retired fashion industry professional, has a $2,000,000 portfolio and has shifted her financial goals from supporting her son to planning bequests after five years. Both cases highlight different stages of life and investment strategies, with Elam being more spontaneous and DuBois more methodical in her approach.

Uploaded by

thomassahaa
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
21 views3 pages

Investment Profiles and Strategies Analysis

William Elam has inherited $750,000 and seeks investment advice to maintain his family's financial stability and plan for future expenses like college and retirement. Bonnie DuBois, a retired fashion industry professional, has a $2,000,000 portfolio and has shifted her financial goals from supporting her son to planning bequests after five years. Both cases highlight different stages of life and investment strategies, with Elam being more spontaneous and DuBois more methodical in her approach.

Uploaded by

thomassahaa
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Class example 1:

William Elam recently inherited $750,000 in cash from his father's estate and has come to
Alan Schneider, CFA, for investment advice. Both William and his wife Elizabeth are 30
years old. William is employed as a factory worker and has an annual salary of $50,000.
Although he receives total health care coverage for himself and his family, he makes no
contributions to his firm's defined benefit pension plan and is not yet vested in any of the
company's other retirement benefits. Elizabeth is an early childhood teacher with a salary of
$38,000. She has only very recently opened a tax deferred 403(b) retirement savings account.
Their four children are ages six, five, four, and three. They have a small savings account, no
investments other than Elizabeth's meager retirement account, and credit card debt of
$20,000. When interviewed, William made the following statements to Schneider:

 With a family of six, our combined salaries just meet our living expenses. It would be
safe to assume that both our salaries and expenses will grow only at the rate of
inflation.
 We do not intend to use our new wealth to improve our current lifestyle, but we may
want to consider setting up a trust fund in the future for our children.
 We would like the portfolio to at least earn enough each year to maintain its current
value in real terms and then to help fund our retirement.
 We also want to use our portfolio to send our kids to college and maybe pay for
future luxuries, like a new home and travel.
 I would like to trade securities like my friend, Keith, who is an experienced and
successful investor. He told me that he holds stocks for no more than a month. After
that, if he hasn't made a profit, he sells them.
 Everyone I know is buying technology stocks, so I feel we should also.
 My mother has the same portfolio she had a year ago. I can't imagine how you can
make any real money that way. Besides, she hasn't taken advantage of any of the
latest hot stocks.
Class example 2

Bonnie DuBois, a 60-year-old U.S. citizen, has just retired after a 35-year career in the
fashion industry. Through a modest lifestyle, disciplined saving, and the help of a financial
adviser, she has accumulated a $2,000,000 diversified portfolio. Over the last several years,
the portfolio allocation has been gradually adjusted to only domestic large-cap stocks and
bonds. She holds only investments she has thoroughly researched and continually looks for
better, more definitive information. DuBois's house has been paid off for several years and
she does not intend to purchase another house. She has always led a modest lifestyle and
intends to continue doing so.

During her retirement, she will help support her son Barry, his wife Betty, and their three
children (ages 14, 12, and 10). Barry's and Betty's combined salaries barely meet their living
expenses. DuBois estimates she will need $60,000 her first year of retirement and likes to
keep 6 months of her living expenses on hand. She plans to continue supporting her son and
his family by providing them with $30,000 next year. Both figures are before tax and are
expected to increase each year at the general rate of inflation of 3%. She has informed Barry
that at her death her portfolio will be gifted to a local museum with instructions to pay Barry
and Betty a lifetime $20,000 annuity. In addition to meeting spending needs, she wishes to
maintain the real value of her portfolio. DuBois is in the 25% marginal tax bracket.

It is now five years later. DuBois's son and his wife have both received significant
promotions so that they no longer require annual support from DuBois. DuBois is meeting
with her financial adviser, Begren Knutsen, to determine if and how her IPS should be
altered. Because she no longer needs to provide the annual financial help to her son, DuBois
will instead plan bequests. DuBois's portfolio has remained at $2,000,000. She and Knutsen
estimate her time horizon at 20 years, at which time she plans to leave a bequest of
$1,200,000 in today's dollars to her son and to the museum ($2,400,000 total). She also plans
to withdraw $75,000 per year, before taxes, to cover her living expenses. She has already
paid this year's expenses, so the first of the 20 $75,000 withdrawals will be in one year
For both examples

1. Evaluate the situational profile according to the following:


 Source of wealth.
 Measure of wealth.
 Stage of life.
2. Classify the investor into the following investor types. Justify your classification.
 Cautious investor
 Methodical investor
 Spontaneous investor
 Individualistic investor
3. Formulate the objectives and constraints (IPS)
4. For example 2 – what discuss changes to the IPS after 5 years

Common questions

Powered by AI

The IPS for William and Elizabeth Elam should incorporate the following objectives and constraints: Objectives include preserving the real value of the inheritance through investments to enable college funding for their children and eventually increase their lifestyle flexibility. Constraints encompass the need to manage their credit card debt, possible liquidity needs for sudden expenses, a moderate risk tolerance due to lack of investment experience, and tying investment strategy with anticipated inflation adjustments. The focus should balance between long-term growth for retirement and preserving capital for immediate familial needs .

With the change in her family support obligations and stable portfolio value, Bonnie DuBois's IPS should be revised to reflect her updated financial status. Dropping the $30,000 annual support need reduces her liquidity requirement, allowing the focus to shift towards ensuring she meets her personal annual expenditure of $75,000. Her new bequest goals, adjusted for inflation, should be clearly delineated in her IPS. Moreover, with her son no longer reliant on her financially, her risk tolerance could potentially be reevaluated to optimize the portfolio for longer-term growth. Her overarching objective of maintaining her portfolio's real value remains, ensuring her plans to leave a significant bequest are achievable .

Bonnie DuBois's conservative lifestyle significantly impacts her financial decisions during retirement by orienting her towards preserving capital and minimizing unnecessary risk. Her modest spending habits mean she is less likely to overspend her portfolio, allowing for a greater emphasis on safeguarding the wealth she has accumulated. This conservatism also aligns her towards safe, yield-generating assets rather than pursuing aggressive growth tactics that could jeopardize long-term stability. Her predictably stable expense patterns further aid in creating a reliable financial plan that accommodates her steady income needs and supports her bequest objectives .

William Elam should focus on addressing several concerns: firstly, ensuring the portfolio maintains its value in real terms to counteract inflation, as he and his wife want to grow their wealth without altering their current lifestyle. Secondly, he needs to consider future financial goals such as sending their children to college and possibly setting up a trust. Thirdly, managing the existing $20,000 credit card debt to reduce financial liabilities should be a priority. His desire to engage in short-term trading like his friend should be evaluated against his risk tolerance and financial goals. Given these multitude requirements, a well-diversified portfolio that aligns with both short-term liquidity needs and long-term growth objectives is essential .

William Elam's multi-faceted goal of using his portfolio for education, real estate, and retirement presents both opportunities and challenges. The benefit lies in leveraging his substantial inheritance to create a diversified portfolio that can cater to multiple financial demands over time. However, conflicting time horizons for these goals necessitate distinct investment strategies—education funding requires secure, medium-term returns while real estate and retirement might need long-term appreciation focus. This increases portfolio complexity and demands a disciplined approach to balance asset allocation, liquidity needs, and risk management, potentially complicating maintenance and execution .

Bonnie DuBois can be classified as a 'Methodical Investor.' Her disciplined saving approach, careful research, and thoughtful adjustments to her portfolio towards large-cap stocks and bonds highlight a methodical and research-driven investment style. Additionally, her focus on maintaining the real value of her investments and systematically planning her retirement finances including funding her living expenses in a structured manner supports this classification .

Bonnie DuBois's intention to leave specific bequests requires that her investment portfolio be managed to ensure growth that keeps pace with inflation while preserving capital. As her plans include both supporting herself with a $75,000 annual withdrawal and leaving $2.4 million bequests in future inflation-adjusted terms, her portfolio must be structured to sustain these withdrawals without depleting the principal excessively. Balancing growth and income generation to meet her personal needs and ensuring that her estate can fulfill her bequest commitments at the time of her death are critical management priorities .

At 60 and newly retired, Bonnie Dubois's life stage significantly influences her investment strategy and financial priorities towards ensuring stability and preservation of wealth. Her immediate priority is to secure her annual living expenses through her portfolio while adjusting for inflation, thus focusing on income-generating investments. Additional priorities include preparing for healthcare costs, considering longevity risk, and maintaining the real value of her portfolio to meet bequest agreements to her heirs and charitable interests. Her strategy will likely prioritize risk reduction, ensuring liquidity, and sustaining her financial support commitments .

Inflation could severely impact William and Elizabeth Elam's retirement plans if not addressed adequately. As their salaries and expenses are expected to grow only at the rate of inflation, any failure of their investments to outpace inflation will erode the purchasing power of their savings over time. This could affect their ability to fund their children's education and personal future luxuries, as well as diminish their capacity for retirement savings. Therefore, ensuring that their portfolio generates a real return that at least matches inflation is crucial for their long-term financial health .

Emulating his friend's short-term trading approach might offer William Elam quick capital gains during favorable market conditions, fulfilling his desire for active investment involvement. However, without the necessary experience and knowledge, this strategy introduces significant market risk and volatility, potentially resulting in substantial losses, especially during market downturns. The high frequency of trades can also incur considerable transaction costs and tax liabilities, eroding returns. Given William's expressed desire for at least maintaining real wealth value and with other financial priorities, such as family and retirement, this high-risk strategy could be misaligned with his broader financial objectives .

You might also like