posted by littlemomatee on .
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.
How would you like us to help you with this assignment?
Not taking time to evaluate portfolio performance and rebalance different sectors and investment types is a serious error.
Why should he be the one to pay $20,000 for the wedding and honeymoon? And why wait three years to marry if if he has found the right woman? Choosing the wrong high-maintenance spouse can be as serious an error as a neglected portfolio.
It is never too early to set a value for a retirement nest egg. If he is about 30 today, will need at least $5 million in 30 years.
At his age and risk tolerance, and in today's investment and high-inflation environment I would favor a 55/30/10/5 balance of equities, bonds, cash equivalents and commodity index funds. Both bonds and equities should be at least 1/4 foreign. I tend to favor ETFs over open-ended bond funds.
What I have written above is deliberately general, and represents my personal philosophy. You will have to come up with your own portfolio and justifications.