This content examines Joe and Sara’s investment behaviour through behavioural finance concepts like loss aversion and status quo bias. It highlights the gap between their low risk tolerance and their actual financial capacity.
a. Risk Profile
Joe and Sara are 62 years old and do not have any other income source Other than their investment portfolios to finance their lifestyle. They are very sensitive towards risks and therefore are concerned with loss making in investment having been very cautious over the next twenty years without altering their portfolio balance. This, clearly, is an emotional response to the changing qualities of the market and the indication of a very low tolerance threshold.
This is in reference with the “loss aversion” concept in behavioural finance whereby people avoid losses more than they value gains, hence they end up being rigid when undertaking investment. However, Joe and Sara have a risk-assuming capability because they have $1,000,000 of investable assets and own a paid-up $750,000 house. This implies that they have a moderate to high financial risk-bearing capacity because these people spend about $50, 000 per year in meeting their basic living needs. Nevertheless, their risk tolerance psychological factors and preference for their portfolio are lower than their capacity. The behavioural finance theory known as the “status quo bias” suggests that investors do not like change and hence Joe and Sara won’t consider changing their decisions even though there could be changes that would be more beneficial.
7 Years | MBA
Our reference resources are designed to assist students in understanding how to structure assignments and enhance their academic skills. As an experienced assignment helper in UK, we guide students without delivering copied content. The Investment Strategy And Portfolio Optimization For Retired Clients: A Case Study Sample showcases how to organise content, present observations, and discuss results effectively. These materials are provided solely for educational reference.
b. Investment Goals
Joe and Sara’s goal is to ensure that available cash to meet annually $50,000 expenditure which is expected to experience an annual inflation of 4%. In terms of net asset value this in itself implies that over the next 25 years there will be a continuously rising fundamental requirement to take money from the portfolios and thus there is a long-term use for the ‘money laundering’ of investment strategies. Furthermore, they experience medical costs in the future which is another unpredictable occasion and should be also included in the contingency.
A second minor positive reason is that they have a legacy goal of ensuring that they bequeath at least $1.5 million to their children and the grandchild. Holistically, it is crucial to clarify that this figure does not include the value of their homes they wish to contribute to the development of their community (Abronski et al., 2021). For this reason, the portfolio has to provide enough returns to finance their rising annual expenses and retain the legacy aim.
In order to achieve both a sustainable withdrawal rate and maintain and grow their wealth, their investment strategy should seek to earn something in the realm of a real return, or a return after inflation, somewhere in the vicinity of 5% annually after taxes. This in effect puts the demand for gross return per year at around $1.25m, the figure factoring for an estimated tax of 20%. The portfolio must be kept balanced in the way that it should have moderate returns, low prices fluctuation, and acceptable draw down.
c. Liquidity Requirements
The funding that Joe and Sara need is $50,000 per year for their living expenses which should be easily accessible and should factor in the rates of inflation. The portfolio must have sufficient cash flows to cater for these petty cash usage without having to liquidate at an inconvenient time. Hence, cash is useful in emergencies, particularly in cases where they are to be admitted for medical attention as they grow old (Gouett, 2022). This is through the taxation of all forms of income and gains at a rate of 20% thus cutting down net returns therefore the provision of reasonable amounts to ETFs or to tax defer able investment tools wherever possible.
Joe and Sara’s portfolio is divided 20% in each of five categories: US large-cap equity, international stocks, US government bonds, international bonds and crypto, gold, hedge funds. Overall the current portfolios also show diversification but they probably do not fit the risk profile of the clients. The high level of the annualized volatility is evident from the above data where the contribution from the component of the alternative investment has been around 30% whilst for the bonds it was 8-10%. As such, exposure to such highly volatile assets is not suitable for them because it will only increase their risk tolerance levels and therefore their level of anxiety when stock prices are declining.
Get assistance from our PROFESSIONAL ASSIGNMENT WRITERS to receive 100% assured AI-free and high-quality documents on time, ensuring an A+ grade in all subjects.
In a portfolio theory, using equally weighted assets to allocate the funds is consciously suboptimal especially for investors who are risk-averse. For example, high volatility assets may contribute most of the portfolio risk, while, may occupy only a small proportion (Oino, 2021). The mean target share ratio and the actual volatility proves the fact that the portfolio has 20% invested in alternatives and 27-30 % correlation between assets. Self-constructed correlation matrix reveals the facts that equities and the rest position have low to moderately high correlation; for instance VOO and GLD 0.48 that means that diversification benefit is low.
Finally, the current structure does not consider the preservation of capital or income stability sufficiently satisfactory in order to meet Joe and Sara’s preferences. There is no provision of specific income-generating securities like an ordinary share or municipal bond leads to inefficiency in the business. This is due to the fact that they can still obtain good returns (e.g., VOO has ~15% annualized return in the past) but the risk and drawdown profile is beyond what is palatable for them. To realise these objectives, it is crucial to rebalance the portfolio, have lower risk level and generate higher income in their projects.
Based on the best advice to Joe and Sara on the new portfolio design, five securities have been chosen from the list in an attempt to take a more conservative approach while maintaining diversification (Bianchi and Bigio, 2022). The selected assets are equities, bonds, and other instruments that are mainly in the form of ETFs that are liquid, transparent, and cheaper than direct investments, especially for retired investors.
The recommended investment with VOO will give investors a chance to invest in 500 prominent companies in America, thus creating a strong and conservative equity portfolio. Historically, it has a good overall annualized return on investment at 23.01% although it is associated with some level of fluctuations in the market with a volatility of 48.71%. This may seem quite dangerous, but dedicating 20% to VOO enables the portfolio to retain its purchasing power in the long run and fight inflation with the help of capital appreciation. VOO has low gross expense ratios as an S&P 500 index, so investors who desire large-cap US equities growth exposure at a low fee without much volatility are well-suited for this ETF.
IEF is a high-quality bond ETF that invests in the long-end of the US Treasury securities. Nevertheless, it posted a negative return of -3.25% within the sample period; nonetheless, interest income and portfolio stability during bear runs are offered. With the standard deviation of 25.43%, it is below equities in this case and, therefore, more suitable to reduce risks (Landoll, 2021). We invest 25% in IEF which is a form of capital preservation in an effort of minimizing volatility in the portfolio.
BND focuses on offering a diversified access to Investment Grade US bonds with both the corporates and the Treasuries. While it also shows a slightly negative Sharpe ratio of -0.273, It has relatively lower standard deviation of about 21.62% and also improves diversification. As normally yields from bonds are expected to come back to normal then BND provides steady income flow. To provide for immediate income requirements and avoid too much concentration of risk, 20% of the biweekly funding is recommended to be used.
NOBL targets companies which are listed on the S&P 500 index and which have a record of having increased their dividends for a minimum of 25 years. The Sharpe for this fund is 0.631 outstanding and the risk-adjusted measure of return, the Treynor measure, stands at 0.236 with an information ratio of 0.293; the standard deviation return ratio is 35.28% while return on this fund is 11.63% whereby it qualifies it for conservative equity allocation (Rauh, 2023). Dividend income may help to solve the issue of withdrawal with reference to the fact that it won’t erode principal. Since it is a risk-free investment and it’s the money that is to be used to support income, it is best to assign 20 percent in order to maintain a balance.
Exchange traded funds (ETFs) such as streetTRACKS Gold Trust offers investment exposure to gold which has always been a protection mechanism against inflation and deterioration in market conditions. The SOYB has a strong return of 16.46% and a rather high volatility of 42.46% which seems not to have much linear dependence with equity. Hence, we invest 15% in GLD to protect our purchasing power during the times of uncertainty in the economy.
Justification for Asset Weighting
The proposed asset mix is a moderate to moderately conservative blend thus aiming at both capital conservation and real rate of return. The target asset allocation of the US bond ETFs (IEF and BND) contribute 45% to minimize the risk and guarantee the stable income (Rompotis, 2022). VOO and NOBL are equities that provide 40% of the portfolio for capital appreciation and dividend income. Last, 15% in GLD has inflation protection and volatility hedge, as gold is known to outpace inflation in the long-term.
This means that this diversified portfolio has low correlation between the classes of assets it owns in order to minimize risk while at the same time not compromising too much on the returns. This design is less appropriate for Joe and Sara than the equally weighted portfolio because it aims at minimizing their risks while providing high liquidity and achieving their long-term goals.
Based on the specific goals and risk tolerance of Joe and Sara, five ETFs have been selected namely VOO, IEF, BND, NOBL, and GLD. Each asset class was chosen based on the weights in terms of risk, capital, income, and inflation respectively, in accord with its risk/return requirements.
Having obtained the price of each security between January of year 2021 and December of year 2024, we determined the weekly return of each security and also arrived at the weighting total portfolio’s weekly return given by the sum of weighted return of the individual asset. This was done to estimate the weekly return series on a yearly basis for overall performance of the portfolio.
The expected gross return in the portfolio is approximately 6.25% (4% inflation plus 20% tax) which is so comfortably surpassed by the actual annualized return of 10.17%. Hence, a volatility of 28.25% is much lesser compared to individual stocks such as VOO with 48.71% and NOBL reporting a volatility of 35.28% thus proving that the portfolio’s diversification helps in managing risks.
The correlation matrix presented indicates a low-moderate level of relationship among the assets available. For example, IEF has an annual correlation with VOO at only 0.26, and GLD has only low to middle correlations (0.29 - 0.48) with the markets and are considered as a hedge against equities. It was expected that the IEF would show a high level of association with BND of 0.98 as both of them are fixed-income asset classes.
Portfolio Suitability Analysis
The constructed portfolio provides good diversification across the assets classes and most of the economic sectors. Bonds make up 45% of the portfolio, which stabilizes volatility and allows for expected redemptions; meanwhile, dividend-paying and large-cap equities constitute 40% with the conceivable returns. The 15% in GLD helps in offering better hedge against macroeconomic risks and other risks such as inflation.
In summary, the redesigned portfolio is well-aligned with Joe and Sara’s investment goals:
This balanced strategy should reduce their financial anxiety, generate sustainable income, and help achieve their long-term inheritance and lifestyle goals.
In order to analyze the effectiveness of the newly designed portfolio for Joe and Sara, it is important to set an adequate benchmark. For the benchmark portfolio, we have chosen 60 percent, invested in VOO while the rest of the 40 percent invested in BND which is the US Bond Market ETF. That is why this portfolio matches the typical moderate risk portfolio that retired people usually consider with the help of their financial advisors (Eren and Wooldridge, 2021). This benchmark is opposite to Joe and Sara since it combines the growth mechanism of equities with the incomes and steadiness of bonds- in line with their new goal. It also offers an objective benchmark, which makes it possible to evaluate the optimal assets list offered by the company against commonly recognized parameters.
Our portfolio has only managed to earn 8.04% per annum however, this is lower compared to the benchmark of 12.71% with 25.55% risk compared to the benchmark 33.27% this is suitable for Joe and Sara’s low risk taker profile. The Sharpe Ratio of risk-adjusted return is obtained at 0.24, and it is lower than the benchmark’s 0.32. Still, this sheds negative light on the fact that lower volatility is accompanied by a greater downside protection and low passing of depressing feelings to cautious investors.
However, this is in line with the benchmark and shows that our portfolio has utilized market risk (beta) more efficiently with a Treynor Ratio of 0.14 as compared to benchmark 0.11. This proves that for every unit of systematic risk our portfolio has a higher degree of excess returns thereby underscoring the importance of diversification and efficient asset allocation (Wang et al., 2022). As such, for achieving the highest level of returns, portfolio B of the benchmark has been selected, however, our recommended portfolio is much more appropriate for Joe and Sara’s circumstances since they will not experience sharp spikes in their stock prices as well as have sufficient returns that will allow them to achieve their long-term goals.
It can be concluded that the resigned portfolio is suitable for Joe and Sara’s financial requirements but is also good for them emotionally. While the bonds portion makes up 45% of its holdings, the equities have 40% provision for regular payers and large capitalization and gold only forms 15% of the value of the strategy. These dynamics made sense for them as the portfolio’s return is less volatile and fits well within their low risk appetite of preserving a $1.5 million inheritance.Some bright sides of this strategy are definitely the risk management through diversification, the return rates, which are higher than 6.25% after taxes in case of the C ore Fund, and liquidity through ETFs that provides the means to sell the stocks in a timely manner to cover annual expenses and, if needed, medical expenses. Minimizing taxes is attained through the utilization of passive ETFs and through choosing instruments with low turnover.
Reference List
Journals
Introduction: 5HR02 Strategic Talent & Workforce Planning Students can improve their understanding of workforce...View and Download
1. Introduction Financial Accounting plays a vital role in business because it keeps systematically recording itemized,...View and Download
Introduction - Consulting in Practice Portfolio Elevate your academic performance with our personalized Assignment Help, created...View and Download
Introduction to Research Proposal Assignment Sample Background To Research Research area and its significance In the UK...View and Download
Introduction - Introduction to Business Management Assignment Sample The focus of individuals is shifting toward consuming...View and Download
I. Introduction: The Major Changes to How We Work Now to the Previous Decades In the dynamic business era, the working pattern...View and Download
Copyright 2025 @ Rapid Assignment Help Services
