Look at this case. I m new to this kind of stuff.
Any help/suggestion?


Mat and Kathy recently won the lottery. Mat is 45 and Kathy is 38 years old. They have 5 children and they are members of a very strict religious group (no alcohol, no tobacco, no birth control, no gambling - but Mat didn’t tell Kat about the lottery tickets until he won). Mat works as a carpenter at the local cabinet making company and Kat stays home with the kids, ages 3 mos. to 11 years. Mat earns about $40,000. He likes his job and will continue working with his hands. Kat is always tired. John’s ticket won $1.8 million dollars, after taxes. Mat and Kat will immediately donate 10% to their church. They are seeking advice on managing the rest of the money.


What kind of questions would you ask them further? These notes will be filed in the client file and used as a resource for managing the portfolio. You can also get some assumption about the client...


Give a short MACRO. What are your expectations for the economy over the next 6 to 12 months with justification.

Then based on those information I need to construct a protfoilo (balanced portfolio) and should explain the asset allocation.

I will list the securities for portfolio construction soon

Thanks

coolnepali, you are managing their money, well i can help you with that, but the first thing, do you even know what they wanna achieve with that money.

first thing that you need to do is, talk to your client, more than that, LISTEN to your client. see what they wanna achieve, what are their goals, do they still wanna work ( coz if not your first pririty should be to generate atleast 40K a yr, mats salary.

managing money is not just about investing, its about , for what reason to invest.

let me give you an example...when are they gonna need money if they invest, if they want only after they retire 59 1/2 , then look into variable annuity , which is tax - deffered, or better yet, single premium variable life insurance( because its invested in market, no tax payable at withdrawl, and there is a lump sum death benefit).


1 more thing you r over looking her, with will cost your client his leg and arms. you said,its 1.8M after taxes, you know what that means, he's close to 2 M estate tax , cap, look into estate planning, trusts.

what state is he in, what r the state tax laws.

there are lotta things involved, manaing money is merely just about investing.

That's true Mansion,

You really have to understand their goals? How much risk are they willing to take? There are different state laws you have to deal with. Most people think once they hire someone like you, you would automatically turn their investment into money making machine. They don't know how it works. And if they were to loose any single penny, they are going to blame you for rest of your life. Therefore, this is a sensitive issue, get them involve in the process. No one has time to go do research on all that securities you posted here and even if someone did, your decision should not be based on those unreliable information.

Once again, it is all about, how much risk are they willing to take?

coolnepali...also do " investor profile " to find out risk factor.

or here is a more effective way, ask them how much of 1.8 M can they affort to loose.if they say 900K,(WHICH IS 50%) then you invest 50 % in stock , 50% in(bonds, cash, RS, money market).

Here as an example, fo someone who doesnt wanna take rish, but want modest growth over inflation.

Stock/Mutual Fund Total---------------------------35%
Large Vlaue-Large Blend (15%)
Mid/Small Cap (8)
Foreigh (8%)
Real Estate (2%)
Precious Metals (2%)

Bond Total.........................55%

Short to intermediate Term(30%)
Inflation Indexed (20%)
Foreigh (5%)

Cash and Equlivalent..............10%

MACRO:
What we have here is the monetary inflation which the fed and the banks world wide are trying to fight by raising intrest rate. In past few years the growth of the so called "hot money" had contributed to all the global economic growth and since the growth can't go on forever, and hence the signs of slowing global (and american to be specific) economy the fed and the banks worldwide are raising the interest rate and cutting back on money supply to counter the inflation. What I see in the next 6-12 month is the considerable slowdown in american economy with dollar loosing its value against Euro and Yen (basically the fed raising interest rate at faster pace in last few months is the only reason dollar had been appreciating against other forex and we can expect at most one more rate hike by the fed, I think). The price of gold and other precious metal will rise with falling dollar and unceratin economy. Buy only mid- and large- cap industry stock which have already been proven to outlast economic depression. Sell speculative and emerging market.

Thanks for the advice, O_O!!!

you gotta be kiddin me, you make it sound like, its like back in 80's depression, where the interest rate was anywhere from 10-12%, and the country fell in depression.

and did you know, that gold, on average over 20 yrs had risen by onely 3 person, tahts less than average inflation rater 4.3 %.

well anyways.

I don't know what is the point you are trying to make Masion, but just to be sure we are in the same page:
No, it is by no means as gloomy as the 60's or the 80's. I am not trying to be objective as you have seem to put it but you should also understand that relativitism is only relative to certain time frame. I don't care about what happened 20 odd years ago, I care about what happened 1 year, 1 month or 1 day ago and how it can affect me 1 day 1 month or 1 year hence. I am not trying to predict the gold price for 20 more years. I am just trying to do the same for next 6-12 months which you might have missed in my earlier post.
Not trying to be offensive or anything but that post of your is way out of point

no offence taken,

everyone has a diff view, and thats a good thing coz everyone gets to learn more info.

may be you dont care about past history, may be you rather focus on few yrs , that might be just fine for you.

what my point is, in a financial world, the market cannot be predicted based on 6months and 1 yr cycle.

may be you r a short term investor, but i prefer long term, atleast 5-10 yrs.

regardless,whatever makes moeny for you, is good for you.

and again..no offence.

Hi Guys,
Thanks for your input..
Ok here is more details..

After interviewing the client this is hwat I got as a client profile..

Based on the interview, I ofund client to be conservative. Client has no idea about invetsing, and has no knowledge about it. When asked about eductaion for their kids (private vs public ) he replied private.

Client is willing to invest 50% of 1620000 (he is donating 10% of 1.8 mil so after that donation he will have 1620000) to church. So amount willing to invest is $810000.

Client is a low risk taker. He will be concerned if his investment goes down. he do not want to have further edication at this time, neither does his wife.

The can not say about having more kids. According to them its all in hands of god.

They do not want to retire in beach.

---------So again based on this I concluded that they are conservative....Am I wrong? Any more assumption shall I make?

Now when building a conservative portfolio..I did the following

I chose to put 40% in stocks, 40 in bonds/ishares and rest in mutual fund.

So that will be $324000 in stocks, 324000 in bonds and 162000 in mutual fund.

Snce there are large cap, mid cap and small cap...I m again putting 50% of $324000 in large caps, 30% in med cap , and 20 in small cap. Basically out of 40% allocated for stocks I m further putting 50% of 40% in Large cap and so forth. Basiclaly 20% of my portfolio will be large cap.

The reason I chose large cap is becuase of stability and low risk, but at the same time their stock price could be higher and expensive and for a conservative person that might not be the right match. So i m kind of confused whether I did the right thing in putting more on large cap.

Now how do i select the stocks? I need to look at PE/s ratings, etc right?
Which stocks would you choose from the list above and why?
about 20-25 stocks in portfolio is fine for me and needs to be exposed to all sectors.

let me know if i m wrong...

-------

After this then I will need to develop a strategy using options to enhance the yield on the portfolio. The strategy must be appropriate for the client's risk profile and objectives


Thanks again.

Man, you are focusing tooo much on just investing. dont forget when you're investing someones money, you are handling their life.


1. Do they have an existing will.
2. Power of Attorney.
3. what are the current liabilities ( total debt-including mortgage on their house and business + any outstanding business loans)
3. current asset.
4. what is their monthly expense ( as of now personal + business)
5. will their be any significant changes in their life style ( dont belive if they say no)
6. how old are the kids
7. what do they have now ( life insurance, mutual fund, CD, disability,HOW MUCH)
8. What is their current tax bracket ( without the lottery money)
9. what is the compnay listed under( is it a c-corp, s-corp, ll,personal)
10. any existing trust in place.
11. how do they feel about retiring ( what age)
12. if they were to die tomorrow, where would they want the money to go.
13. after they retire, how much of current money do they want to recieve.

Mansion...
Thanks,
Here is the answers..



1. Do they have an existing will. --NO
2. Power of Attorney. --NO
3. what are the current liabilities ( total debt-including mortgage on their house and business + any outstanding business loans) --Mortgage + Car payments
3. current asset. --Just a house
4. what is their monthly expense ( as of now personal + business)
5. will their be any significant changes in their life style ( dont belive if they say no) --not really...Except buy a new car, put kids into private school
6. how old are the kids --6 kids ranging from 3 months to 11 years
7. what do they have now ( life insurance, mutual fund, CD, disability,HOW MUCH) --nothing
8. What is their current tax bracket ( without the lottery money) --no idea
9. what is the compnay listed under( is it a c-corp, s-corp, ll,personal) --no company
10. any existing trust in place. --no
11. how do they feel about retiring ( what age) --about 56
12. if they were to die tomorrow, where would they want the money to go. --to the kids, charity/church.
13. after they retire, how much of current money do they want to recieve.--no clue

--------------------

Thanks,

WOW!!!

A MORTGAGE, 2 CAR PAUMENTS AND 6 KIDS!!!

6 KIDS!!!


coolnepali,

You shold suggest your clients to forget abut invest and work on expense controlling.

u_day,
But they just won lottery .
read above.
They will invest only 50% of their winnings.
I want a conservative portfolio.

Coolnepali!!

Please read your assignment question again.

Neither Mat nor kathy won the lottery. Some guy named John won 1.8 mils.

Quoted from above:

>> Mat earns about $40,000. He likes his job and will continue working with his hands. >>Kat is always tired. John’s ticket won $1.8 million dollars, after taxes. Mat and Kat will >>immediately donate 10% to their church. They are seeking advice on managing the >>rest of the money.




It's just a trick question!!!

OK..Priority.

Again..this is what i would advice my client (with the given info that you ahve provided)

1. Have your client get a will + Living Will

Reason- If your client dies tomorrow, all his asset will go into probate. The court will decide who gets what. Worst yet, If both die tomorow, there will be a tug war between the family memebers from both side, regarding the guardain ship of their kids + their small empire.

Who will take charge of financial and personal decision if he gets into bad shape.
The first thing you need to advice your client is to make a will, guardainship of their children.

A simple one, you can always update it.

2. Pay off all his Debt ( beside the mortgage, or he could pay that too)
Reason, now all his regular income is fixed, and free, not tied up.

3. Emergency Fund.
- 6 months of his "House hold expense" in his saving account. with 3 kids, i'd believe that would be anyweyr from 3-4K *6 = 18-24. ( just for emergency).

4. Update his Insurance. You need to talk to your client on how he feels about it.
He's 48, I'd go with 20 yr Level term for 400k ( 10 yrs of his salary)
Another 1M in Joint Survivorship Life Insurance.
i'd not really bother for the wife right now, since she is not generating income.
Long Term Care Insurance.
Disability Insurance

Again, this all depends on how yur client feels about them and how well you can explain and make them understand why this is sooooo important for estate conservation in bothy short and long term.

5. Income.
Ok here i dont agree with you and your client. i dont see how anyone can afford to raise a family with 6 kids for 40 K.

His income needs to goo up.

Assuming he uses some money to pay off all the debt. I'd think he'd want to raise his house hold income by atleast 50% totalling 60 K.(BEFORE TAXEX--HE IS IN 28% TAX BRAKET---I DONT KNOW WHAT STATE IS HE IN, SO I DONT KNOW ABOUT STATE TAX)

6. Kids.
Open up a 529 Plan. You can put all his kids as the beneficiary. Max per yr he can contribute is 5000.00. It grows Tax deffered, meaning you dont have to pay taxes on the gain.

The only thing.....The money in 529 can only be used for education purposes. If not then there is 10% on taxex, and then your reguar tax .

But again, with 6 kids, all wanting to go to private college. you do the math how much he'll have to invest. the avg rise for private college tution fund is 18%.

iN NEXT 10 YR, TO ATTEND A PRIVATE COLLEGE IT WILL COST $175000 FOR 4 YRS. educate your client about that......and see how he changes from going to private college to public..


7. MAT IS 48 ( 8 yrs to retire at 56, according to you)
he is not eligible for SS , medicare, untill he's 59.
I assume, if at retirement, he will have no income, if all his income is comming from his bussinss now....( he's gonna either close or sell his business at retirement isnt he.....what extra income source does he have )

So ok your other priority.
Invest sum equal for 8 yrs that will return atleast 60 K ( to match his current income).

If u ask me i'd go with variable annuity, rather than mutual fund, coz they grow tax deffered, if you invest in MF, he'll have to pay taxex on gain everyyears.

Why...
Most Variable annuity, has a death benefit, meaning the principle will never go less .
Surrender charges are generally from 5-7 yrs.
Tax Deeferd growth.
Bypasses Probate if he dies before he enjoys his retirement.
Creditors cant touch it. No law suit or anything.


8. Now substract all that from 1.6 M.

and if he is a conservative. then diversify like this.

Stock/Mutual Fund Total---------------------------35%
Large Vlaue-Large Blend (15%)
Mid/Small Cap (8)
Foreigh (8%)
Real Estate (2%)
Precious Metals (2%)

Bond Total.........................55%

Short to intermediate Term(30%)
Inflation Indexed (20%)
Foreigh (5%)

Cash and Equlivalent..............10%


NOW, I'd not invest in stock...i'd just go with mutual funds, see the return for atlesat 5-10 yrs, with atleast 10 %.

And i'd advice him not to just buy mutual funds. Do it inside the annuity and ROTH IRA.

EXAMPLE- 1.5m with 8 % will be 3 M in 9 yrs ( 1 yr after he retires). if he dies then. his kids will have to pay upto 50% in estate tax for more than 2 mil. so in this case, for 1 mil, they will pay 500k in estate tax......this is where that survivorshipe life insurance come to play.

assume he doesnt die. in next 9 rys. 3 mil grows into 6 Mil.

i dont wanna get into estate planning and stuff like that, it'll be too confusing.

ok seriously, is this client for real, or is this just a case work for your school, coz i am not wasting time for that.

Mansion, you kidding me? This is ofcourse a school project...its so obvious
...but i rather you help coolnepali...

not a school project.

I m doing a trial. I m trying to go into finance environment.
My background is however in social science.
By the way it was Matt who won the lottery not john.

Thanks,

Hats off to Masion. I'll surely hire you if I win 1.8 MM in lottery!! I like your enthusiasm.

mansion,
wow.. u r gr8.

u seem 2 be vry well versed huh...

now that 6 months rules of EMERGENCY FUND ... u need to upgrade that to 12months.. (O: