Thank you for helping! Ok, here is the actual assignment:
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.
1. Explain some disadvantages of Cliff's current investment approach.
2. Construct a portfolio for Cliff, limiting your selections to 5 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. Visit an investment firm that deals in mutual funds, such as, Vanguard.com, AmericanCentury.com, Fidelity.com, etc. and select 5 mutual funds that will diversify Cliffs portfolio. Record the fund name, ticker symbol, 5 year average annual returns (can use 3 year if 5 year is unavailable), the amount to be invested in each fund, and the amount returned in 3 years using the 5 years average annual return for the wedding.
3. Explain how Cliff should periodically rebalance his portfolio, indicating how frequently rebalancing should be done.
SHOW ALL WORK FOR EACH ASSIGNMENT AND EXPLAIN EACH STEP CAREFULLY.
And here is what I have thus far, but I'm not sure I'm doing it right:
The way Cliff is handling his portfolio right now is quite foolish. If he doesnt keep a constant eye on his portfolio he could end up losing everything that he has invested, and $90,000 is no small chunk of change to risk losing. According to
www.investopedia.com a bond is a form of debt with which you are the lender instead of the borrower. Bonds are contractual loans made between investors and institutions that, in return for financing, will pay a premium for borrowing, known as a coupon. Additionally, the bond's face value is returned to the investor at maturity. The guarantee of payback and all coupon payments relies solely on the ability of the borrower to generate enough cash flow to repay bondholders. What this means for Cliff is that the only way hell generate a profit on his investments is if the borrower is able to generate enough cash flow. If the stock takes a nosedive, Cliff loses money. If the borrower cant generate enough money with the bonds, Cliff loses money. Its a gamble, especially with his poor research of which ones to invest in. Just because they sound good on paper doesnt mean that they actually are good. He should have researched each one very carefully before investing anything.
To plan a portfolio for Cliff, first we need to break down the $90,000 that he will transfer from his previous investments over to these mutual funds. In reviewing possible fund choices on Vanguard.com, I found a mutual fund called the Vanguard LifeStrategy Fund. They offer 4 different funds. One is a life fund for short term investments (3 to 5 years) with low to moderate risk, one is a conservative growth fund meant for investments lasting longer than 5 years that carries a moderate risk, one is a moderate growth fund, also intended for longer than 5 years with a moderate to high risk, and the last is a growth fund with a high risk factor. Now, Cliff wants to start a retirement fund and he wants to save $20,000 for his wedding in 3 years. Personally I dont know how he plans to budget a wedding and a honeymoon for only $20,000, but it would probably be good for Cliff to take $20,000 out of the $90,000 and invest it in the short term Life Fund. The average annual return as of June 30th 2010, for this fund (VASIX), at the 5 yr mark is 3.86%. After 3 years Cliff would have enough money to cover the cost of the wedding and the honeymoon as well as other expenses that may be incurred that were not necessarily planned for such as increased rental hall fees or a larger guest list than originally budgeted for.
And here is the link to the mutual fund website I'm using:
https://personal.vanguard.com/us/funds/vanguard/LifeStrategyList#lifeStrategyAnchor
I stink at finance and don't know if I'm suppose to be compounding the interest or what. This teacher is wicked hard too, doesn't offer any help, expects us to know what we're doing, and is very sarcastic. I don't like him.
