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Investment Portfolio - Assignment Example

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Investment Portfolio

He does receive a cost of living adjustment on an annual basis of 3.5%. His wife works part-time as a freelance photographer; however, her pay is considered supplemental income, as her workflow is not deemed steady enough to cover anything more than the car payments for their two teenage children, ages 17 and 16. Both children also have 529 plans established, gifted to them by their grandparents ten years ago. Therefore, college tuition is not considered a financial objective, as higher education will be essentially paid for through these particular savings plans. Finally, the investor has ten years left on a 30-year mortgage note, thereby paying off the loan ten years before he enters retirement. The monthly mortgage payment is approximately $1125. Since the couple looks at their residence as their dream home, they have no intentions of ever selling their property nor do they intend to purchase a second home. They do not foresee any other significant expenses on the horizon; however, they do have an emergency fund valued at $10,500 to cover any problems that may creep into their financial picture. It can be assumed, then, that their objective will not include constructing an emergency reserve. They can, and will, focus solely on retirement savings. I. Investment Policy: A study conducted by Klein and Iammartino in 2010 states that Modern Portfolio Theory supports the notion that there are three main factors that must be considered when selecting the various investment vehicles that will comprise a sound portfolio: diversification, risk tolerance, and time horizon. In this particular situation, the investor’s age and risk tolerance reflects a need for a moderately conservative approach to building the portfolio. While the investor still has some time on his side for wealth accumulation, stocks traditionally perform rather inconsistently, making it virtually impossible to predict what direction the securities will take on any given day. Of course, most portfolio profits are made by investing in securities, as their sheer nature is to grow money. But like anything in life, there is give and take. While highly lucrative, stocks are also highly volatile, which increases the risk that an investor could lose all money put into a particular security if the company is changing management, losing its competitive edge in the industry, or even worse, headed for insolvency. As times goes on and retirement inches closer, an investor will have less reaction time to deal with any of the above circumstances that are adversely affecting the portfolio’s performance. Consequentially, it makes good financial sense to build in shock absorbers to help alleviate any additional burdens the investor takes by putting money into equities. These absorbers are referred to as fixed income, which is a more secure asset class because these investments pay out through fixed interest rates for a pre-determined time frame and, in some cases, are insured, should the debtor become insolvent. Fixed income is mainly comprised of bonds and CDs. They are not as profitable as equities and can bring their own element of danger simply because more conservative investments typically cannot outpace inflation (think of your investments flying down a freeway with inflation as the highway trooper clocking the speed at which the money is growing). Still yet, they do provide guarantee, which gives the investor peace of mind that the money will never be lost. It can be said then that the aforementioned investor will need to allocate a certain percentage of his money to stocks, bonds, and finally, cash to provide necessitated liquidity in his portfolio, should there be another global downturn in ...Show more

Summary

The Investor is a 47-year-oldmale who is looking to retire at age 67, the first year he is eligible for full social security benefits. He is a district sales manager for Bob Forsythe Auto, a large and highly profitable dealership in mid-Missouri…
Author : sigurdmarquardt
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