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Cliff Swatner's current investment approach

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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 5 mutual funds (assume that he sells his current stock and bond holdings). Make sure your plan indicates specific dollar amounts for each portfolio component. Make sure your plan also explains your selections for each portfolio component. Visit an investment firm that deals in mutual funds, such as, Vanguard.com, AmericanCentury.com, Fidelity.com, etc. and select 5 mutual funds that will diversify Cliff's portfolio. Record the fund name, ticker symbol, 5 year average annual returns (can use 3 year if 5 year is unavailable), the amount to be invested in each fund, and the amount returned in 3 years using the 5 years average annual return for the wedding.
Explain how Cliff should periodically rebalance his portfolio, indicating how frequently rebalancing should be done.

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Solution Preview

Procedures
1. Determine the initial amount of the portfolio which is $90,000.
2. Identify the investment characteristics of Cliff Swatner.
3. Explain some of the disadvantages of Cliff's current investment approach.
4. Quantify portfolio objective
5. Create a table such as in Figure 1 (in this step, only the table headers were included)
6. Select the 5 funds and populate the table
7. Compute for returns based on the 5 year average annual return
8. Recalculate the portfolio in three years
9. Discuss portfolio rebalancing

Report
Investible amount $90,000. This investible amount is assuming that Cliff Swatner liquidates his current portfolio which is comprised of stocks and bonds.

Central to the creation of the new portfolio is the investment characteristics and preferences of Mr. Swatner. First, it appears that the purpose of his portfolio is wealth accumulation. Second, it also appears that three years from now, he needs to liquidate $20,000 of his portfolio to use for his wedding expenses and honeymoon. Third, it also appears that he does not have time to actively manage and monitor his portfolio. Given these conclusions, I propose the following investment objectives.

Portfolio Objectives
1. To have ...

Solution Summary

The solution examines Cliff Swatner's current investment approach. How Cliff should periodically rebalance his portfolio is determined.

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