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.

Disadvantages of Cliff's current investment approach:

1. Lack of portfolio evaluation: Cliff has never taken the time to evaluate the performance of his investment portfolio. Without periodic assessment, he is unaware of how well his investments are doing and whether they align with his financial goals.
2. Reliance on articles for investment decisions: Cliff bases his investment choices solely on articles describing good opportunities. This approach lacks thorough research and analysis, potentially leading to misinformed decisions.
3. Lack of diversification: It is unclear from the given information whether Cliff's portfolio is adequately diversified across various asset classes and sectors. Concentrating his investments in certain stocks and bonds carries higher risk, as the performance of his overall portfolio may heavily rely on the performance of a few investments.

Constructing a Portfolio for Cliff:
Given Cliff's moderate risk tolerance and his goal of accumulating funds for retirement, a well-diversified portfolio of mutual funds can be considered. Here's a suggested allocation:

1. U.S. Stock Market Index Fund: $30,000 (33% of the portfolio)
- This fund provides broad exposure to the overall U.S. stock market. It aims to mimic the performance of a major stock market index, such as the S&P 500. It offers diversification across various sectors and reduces the risk associated with individual stock holdings.

2. International Stock Market Index Fund: $20,000 (22% of the portfolio)
- Investing in international markets can add diversification and potential growth opportunities. This fund focuses on global stocks from developed and emerging markets, thus expanding the investment horizon beyond the U.S.

3. Bond Market Index Fund: $20,000 (22% of the portfolio)
- To reduce overall portfolio volatility, including bonds is advantageous. A bond market index fund can provide exposure to a diversified basket of bonds, including government, corporate, and municipal bonds. It offers stability and income generation.

4. Real Estate Investment Trust (REIT) Fund: $15,000 (17% of the portfolio)
- REITs provide exposure to the real estate sector without the need for direct property ownership. This fund invests in a portfolio of income-generating properties, such as office buildings, shopping centers, and residential complexes. It offers potential growth and dividends.

5. Cash or Money Market Fund: $5,000 (6% of the portfolio)
- Allocating a portion to cash or a money market fund provides liquidity and acts as a cushion for unforeseen expenses or short-term needs.

Periodic Rebalancing:
Portfolio rebalancing involves periodically adjusting the portfolio's asset allocation to maintain the desired risk profile. The frequency of rebalancing can vary based on personal preference and market conditions, but as a general guideline, an annual or semi-annual review should suffice for Cliff.

During the review, assess the current asset allocation and compare it to the target allocation percentages. If there are significant deviations, reallocate funds by buying or selling assets accordingly. Rebalancing ensures that the portfolio remains aligned with the original risk tolerance and financial objectives, reducing the potential for unintentional concentration or underperformance in certain asset classes.