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Explain some disadvantages of Cliff's current investment approach. What rebalancing?

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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.

Explain some disadvantages of Cliff's current investment approach.

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.

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

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The 1618 word solution provides good information about Cliff's investing and offers good suggestions about how to do it better.

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Cliff Swatner's investment is not healthy because: -

Acquire knowledge of what one is doing if one is to achieve consistently superior returns. He must have a reasonable capital base to ensure that one is not exposing too much capital to any one investment, and to ensure that one can obtain a big enough return.
Have the discipline to enter and exit the market when entry and exit signals are given.
Monitor your investments.
Also, stock markets can be exposed to sudden downward market movements. (This can be an advantage, if you sell stocks 'short' at the time!)
Â? Stocks are volatile. A single stock's share price can vary widely from day to day, month to month, and year to year depending on numerous factors that are beyond your control.

The most effective way to invest in stocks is to "buy and hold" for the long-term and "diversify" (divide your stock holdings among several different stocks in various market sectors).

Â? The closer you get to retirement age, the more risks you assume with stocks, therefore stocks are best used in the early and middle stages of your career.

Since stocks are so volatile short-term, as you begin to reach retirement age, you should start gradually moving part of your assets into other sectors.

Â? Both buying and selling stocks cost you money in the form of brokerage commissions, so the best strategy for investing in stocks is to "buy and hold" for the long-term.

The disadvantage of stocks is that stocks are not guaranteed to return anything to the investor while the coupon payments and principal of bonds are. Thus, the possibility for high returns is greater with stocks but so is the possibility of losing money.

Disadvantages of bonds are:
? Bonds offer no hedge against inflation because inflation causes interest rates to rise which then causes bond prices to fall.
? Bond prices can be quite volatile because market interest rates vary after a bond is issued.
? Bonds over the long term have lower returns than stocks.
? Bond prices may swing 20% or more if selling bonds before maturity. Speculators might see this as an opportunity but conservative investors will need to ignore price changes if planning to hold to maturity.
? Individual bonds do not compound their interest. However, this is possible with bond mutual funds.
? Taxes will be owed on capital gains/losses (selling before maturity) and interest unless the bonds are ...

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