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Cliff Swatner's Investment

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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. Make sure your plan also explains your selections for each portfolio component.
Explain how Cliff should periodically rebalance his portfolio, indicating how frequently rebalancing should be done.

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Solution Summary

This posting discusses Cliff Swatner's investment approach.. In addition, this posting discusses the disadvantages of his current investment approach.

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STEP 1
Disadvantage of the method Cliff has adapted is that stock is not guaranteed to return anything to the investor. Thus even though stocks sometimes get good returns for the investor there is also the possibility of losing money. In addition the stock may fail to reach its target prices. Some favorable development may induce newspapers and magazines to recommend investing in some stock but after the investment has been made the stock lags behind others in the same industry group. Further, the stocks may become not saleable for some time because company profits begin to fall short of projection. This may create liquidity problems for the company. Moreover, adverse developments may make losses very large for the investor. For a person like Cliff it is very difficult to keep abreast of the developments in different industries, companies and ...

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