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 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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Solution Summary
The solution explains how the change your investments as time passes - the portfolio needs to be rebalanced.
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Some of the disadvantages of the current approach are -
1.Not keeping track of investments - Having made the investments Cliff should have kept a track of them. He should hold on to the investments doing well and sell the ones not doing well.
2.Investing without any specific targets or thoughts - each investment made should be linked to the purpose and the time of investment. Different investments have different risk and return characteristics and these should be kept in mind while investing
3.No Dollar amount as target - while investing, it is essential to have the final value that one wishes to get. Based on these and the expected returns, a monthly allocation can be made. Without the target, it is difficult to put aside any amount of money.
4.Diversification - The money has been put in bonds and stocks. The portfolio should ideally be a diversified portfolio so that the volatility in returns is reduced.
5.Risk profile - Cliff feels he has a moderate risk profile. The investments made by him should also have the same characteristics.
Portfolio of Mutual Funds -
Advantages of Mutual Funds:
? Professional Management - The primary advantage of funds (at least theoretically) is the professional management of your money. Investors purchase funds because they do not have the time or the expertise to manage their own portfolio. A mutual fund is a relatively inexpensive way for a small investor to get a full-time manager to make and monitor investments.
? Diversification - By owning shares in a mutual fund instead of owning individual stocks or bonds, your risk is spread out. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others. In other words, the more stocks and bonds you own, the less ...
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