Class example 1:
William Elam recently inherited $750,000 in cash from his father's estate and has come to
Alan Schneider, CFA, for investment advice. Both William and his wife Elizabeth are 30
years old. William is employed as a factory worker and has an annual salary of $50,000.
Although he receives total health care coverage for himself and his family, he makes no
contributions to his firm's defined benefit pension plan and is not yet vested in any of the
company's other retirement benefits. Elizabeth is an early childhood teacher with a salary of
$38,000. She has only very recently opened a tax deferred 403(b) retirement savings account.
Their four children are ages six, five, four, and three. They have a small savings account, no
investments other than Elizabeth's meager retirement account, and credit card debt of
$20,000. When interviewed, William made the following statements to Schneider:
With a family of six, our combined salaries just meet our living expenses. It would be
safe to assume that both our salaries and expenses will grow only at the rate of
inflation.
We do not intend to use our new wealth to improve our current lifestyle, but we may
want to consider setting up a trust fund in the future for our children.
We would like the portfolio to at least earn enough each year to maintain its current
value in real terms and then to help fund our retirement.
We also want to use our portfolio to send our kids to college and maybe pay for
future luxuries, like a new home and travel.
I would like to trade securities like my friend, Keith, who is an experienced and
successful investor. He told me that he holds stocks for no more than a month. After
that, if he hasn't made a profit, he sells them.
Everyone I know is buying technology stocks, so I feel we should also.
My mother has the same portfolio she had a year ago. I can't imagine how you can
make any real money that way. Besides, she hasn't taken advantage of any of the
latest hot stocks.
Class example 2
Bonnie DuBois, a 60-year-old U.S. citizen, has just retired after a 35-year career in the
fashion industry. Through a modest lifestyle, disciplined saving, and the help of a financial
adviser, she has accumulated a $2,000,000 diversified portfolio. Over the last several years,
the portfolio allocation has been gradually adjusted to only domestic large-cap stocks and
bonds. She holds only investments she has thoroughly researched and continually looks for
better, more definitive information. DuBois's house has been paid off for several years and
she does not intend to purchase another house. She has always led a modest lifestyle and
intends to continue doing so.
During her retirement, she will help support her son Barry, his wife Betty, and their three
children (ages 14, 12, and 10). Barry's and Betty's combined salaries barely meet their living
expenses. DuBois estimates she will need $60,000 her first year of retirement and likes to
keep 6 months of her living expenses on hand. She plans to continue supporting her son and
his family by providing them with $30,000 next year. Both figures are before tax and are
expected to increase each year at the general rate of inflation of 3%. She has informed Barry
that at her death her portfolio will be gifted to a local museum with instructions to pay Barry
and Betty a lifetime $20,000 annuity. In addition to meeting spending needs, she wishes to
maintain the real value of her portfolio. DuBois is in the 25% marginal tax bracket.
It is now five years later. DuBois's son and his wife have both received significant
promotions so that they no longer require annual support from DuBois. DuBois is meeting
with her financial adviser, Begren Knutsen, to determine if and how her IPS should be
altered. Because she no longer needs to provide the annual financial help to her son, DuBois
will instead plan bequests. DuBois's portfolio has remained at $2,000,000. She and Knutsen
estimate her time horizon at 20 years, at which time she plans to leave a bequest of
$1,200,000 in today's dollars to her son and to the museum ($2,400,000 total). She also plans
to withdraw $75,000 per year, before taxes, to cover her living expenses. She has already
paid this year's expenses, so the first of the 20 $75,000 withdrawals will be in one year
For both examples
1. Evaluate the situational profile according to the following:
Source of wealth.
Measure of wealth.
Stage of life.
2. Classify the investor into the following investor types. Justify your classification.
Cautious investor
Methodical investor
Spontaneous investor
Individualistic investor
3. Formulate the objectives and constraints (IPS)
4. For example 2 – what discuss changes to the IPS after 5 years
