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    Portfolio Management for personal financial planning

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    Cliff Swatner is single, 33, and owns a condominium in New York City worth $250,000. Cliff is an attorney and doing well financially. His income last year exceeded $90,000, and he has sufficient liquid assets to supplement his condominium and other tangible assets. Several years ago, Cliff began investing in stocks and bonds. He made his selections on the basis of articles he read describing good investment opportunities. Some have worked well for Cliff, but others have not. Cliff has never taken the time to evaluate his portfolio performance, but he feels it isn't very good. Cliff currently has about $90,000 invested. He has been dating a woman lately and hopes to marry her in three years, at which time he will need $20,000 for marriage expenses and a honeymoon. Cliff's only other objective is to accumulate funds for retirement, but he does not have a specific dollar target for this goal. Cliff feels that he has a moderate risk-tolerance level.

    1.Explain some disadvantages of Cliff's current investment approach.

    2.Construct a portfolio for Cliff, limiting your selections to mutual funds (assume that he sells his current stock and bond holdings). Make sure your plan indicates specific dollar amounts for each portfolio component.

    3.Explain how Cliff should periodically rebalance his portfolio, indicating how frequently rebalancing should be done.

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    Solution Preview

    Investing is an important need for all of us. Cliff's current investment approach is that he has never taken the time to evaluate his portfolio performance. This approach is an adhoc approach. It has got serious consequences. He may not achieve his financial objectives at all.
    Portfolio Strategy may become inconsistent with the changes in need or financial situation and market conditions. No revision of portfolio may make portfolio redundant.
    There is no statutory amount that an investor needs to invest in order to generate adequate returns from his savings. The amount of investment will eventually depend on factors such as:

    - Risk profile
    - Time horizon
    - Savings made
    Portfolio needs to be continuously evaluated. Therefore it is important for an investor to do active portfolio analysis and management. Portfolio analyses takes the ingredients of risk and return for individual securities and considers the blending effect of combining securities. Portfolio management is the dynamic function of evaluating and revising in terms of stated investor objectives. Therefore portfolio rebalancing is necessary to ensure that the strategy stays consistent and current with changes in their needs, financial situation and market conditions.
    Various kind of financial instruments:

    Equities: Investment in shares of companies is investing in equities. There are two streams of revenue generation from this form of investment.
    1. Dividend: Periodic payments made out of the company's profits are termed as dividends.
    2. Growth: The price of a stock appreciates commensurate to the growth posted by the company resulting in capital appreciation.

    On an average an investment in equities in has a given higher return with higher risks attached to it.
    Bonds: It is a fixed income (debt) instrument issued for a period of more than one year with the purpose of raising capital. The central or state government, corporations and similar institutions sell bonds. A bond is generally a promise to repay the principal along with fixed rate of interest on a specified ...

    Solution Summary

    This explains the ways to manage portfolio for personal financial planning