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Personal Asset Management

Client Questions and Assumed Answers:

  1. What is the estimate net worth of your home?
    1. $1,200,000.00.
  2. What is the make, model and insured value of both cars?
    1. Andrew’s vehicle is a 2010 BMW X5 valued at $45,000.
    2. Margaret’s vehicle is a 2007 Audi A3 currently valued at $20,000.
  3. Andrew, do you make any additional payments to your superannuation fund?
  4. How much of your earnings do you spend on Travel?
    1. $30,000 per annum
  5. How much of your earnings do you spend on Charities?
    1. $10,000 per annum
  6. How much do you spend weekly on general living expenses?
    1. $1,100 per week.
  7. Will there be any change in general living expenses in the new few years?
    1. No
  8. What is your investment horizon – when will you need the invested money?
    1. In 15+ years during my retirement
  9. What is your most important investment goal?
    1. I am more interested in have my investments grow over the long-term
  10. Which of the following best describes your investment knowledge?
    1. Basic – I understand the difference between stocks and bonds, but have little knowledge
  11. Please describe your overall view on managing risk:
    1. I am prepared to experience average fluctuations to achieve a higher long-term return
  12. If you could increase your chances of improving your investment returns by taking more risk, would you do so?
    1. Willing to take a little more risk with some of the investments
  13. Please describe your investment goals:
    1. I am close to retirement and prefer to take less risk. Security of capital is of great concern as I wish to maintain my current lifestyle during retirement.

Client Investment Risk Profile

About the client:

Andrew and Margaret Henderson have been married for eight (8) years and have no dependants. They have no debts and recently came into an inheritance of $400,000.

Andrew Henderson is 55 years old, healthy and active. He owns and runs his own business. Doing this Andrew earns approximately $200,000 (before tax) per annum.

Margaret is 57 and does not work.

They own their own home which is worth just over a million dollars

Both Andrew and Margaret have a late model car and recently sold a property for $570,000.

Andrew currently has $320,000 held in superannuation funds, whilst Margaret does not have any super.

They have a jointly held cash reserve of $50,000 used for holidays and when the couple feel like they need a break.

Andrew does not foresee himself slowing down his current pace of work for at least 15 years in which he will then consider retirement.

During their retirement, in order to maintain their current lifestyle, only 50% of Andrew’s earnings will be required.

Assets and Liabilities:

The below table takes into account your current assets and liabilities and determines your net worth

Asset

Value ($)

Cash Reserve

$50,000

Inheritance

$400,000

Proceeds from Sale of Property

$570,000

Family Home

$1,200,000

Superannuation: Andrew

$320,000

Vehicle: Andrew

$45,000

Vehicle: Margaret

$20,000

Net Worth

$2,605,000

Projected Cash Flows before implementation of recommendations:

The below is an analytical projection of your current cash flow and does not represent your current financial position.

Andrew earns $200,000 before tax per annum and super guarantee contributions are made to your account at a rate of 9.5%. As no additional payments are made to the account, yearly superannuation on Andrew’s salary amounts to $19,000.

The jointly held cash reserve account which currently holds $50,000 is a low yield savings account earning interest of 1.85% per annum. Based on this interest rate, the low yield savings account produces joint interest income of $925 per annum.

From the provided information Andrew has advised that all funds he earns is spent on travel and charities.

Margaret and Andrew spend on average $1,100 per week on general living expenses. These general living expenses include necessities like phone, internet, food, medical and clothing.

Based on Andrews salary of $200,000 and interest income of $462.50 from the savings account. The amount Andrew currently has to pay in tax is $63,755.35 (Simple Tax Calculator, 2015). Whereas Margaret pays no amount in taxes as she is under the Australian Taxation Office’s tax threshold of $18,200.00.

Cash Flows

Andrew

Margaret

Salary

$200,000.00

$0.00

Interest Income

$462.50

$462.50

Taxable Income

$200,462.50

$462.50

- Tax

$63,755.35

$0.00

Net Income

$136,707.15

$462.50

Total Income

$137,169.65

Expenses: Travel

$30,000.00

Expenses: Charity

$10,000.00

Expenses: General Living

$57,200.00

Debts and Liabilities

$0.00

Net Savings Capacity

$39,969.65

Risk Management Objectives:

Andrew and Margaret wish the enjoy life and spend all money on travelling, socialising and helping out the less fortunate through charity donations.

The wish to maintain their current lifestyle during their retirements.

Risk Assessment:

Financial and family situations act as inputs in determining the most appropriate portfolio policy for your situation. The most important inputs include the stability and level of your income, family factors, net worth, age and investor experience.

Mr & Mrs Henderson

10 Carinda Road

Box Hill, South VIC 3128

Dear Mr & Mrs Henderson,

Investment Report

Thank you for the opportunity to meet with you and discuss your current financial situation and future needs. I have compiled all the information provided by you into an Investment Report. Please find this attached.

This Investment Report is based on the goals you both share of maintaining your current lifestyle into your retirement.

Please take the time to read through this document and if you have any further queries or concerns please do not hesitate to contact me.

Kind Regards,

Michelle Purgar

C/- Taylor and Swift Pty Ltd

Authorised Representative

Client Investment Report

Andrew & Margaret Henderson

Prepared by: Michelle Purgar

Authorised Representative No: 1702 8660

Phone: (03) 234 7377

Email: TaS@TaS.com.au

Licensee: Taylor and Swift Pty Ltd

AFSL No. 200 265 13

ABN: 12 345 67

Address: Level 2, 121 Baker Street

Wattle Park VIC 3112

Executive Summary:

Current Situation:

Andrew and Margaret are currently debt free and are starting to plan for their future retirement. Andrew is looking to retire in fifteen years or more and wants to make certain that they both have the funds they need to maintain their current lifestyle without making any changes

Goals:

To maintain their current lifestyle

Current Financial Situation:

Andrew and Margaret spend most of their earnings on travel and charity work.

A summary of their present cash flows can be seen below:

Cash Flows

Andrew

Margaret

Salary

$200,000.00

$0.00

Interest Income

$462.50

$462.50

Taxable Income

$200,462.50

$462.50

- Tax

$63,755.35

$0.00

Net Income

$136,707.15

$462.50

Total Income

$137,169.65

Expenses: Travel

$30,000.00

Expenses: Charity

$10,000.00

Expenses: General Living

$57,200.00

Debts and Liabilities

$0.00

Net Savings Capacity

$39,969.65

Issues and Concerns:

Andrew is concerned about the amount of tax he is currently paying and the amounts he will be paying in the future due to investment income.

Both are worried they will need to make a change to their lifestyle in their retirement in the case they are unable to fund their lifestyle and still meet all general expenses and obligations

Andrew believes he is capable of doing the investments on his own and does not feel the need to employ professional help.

Recommendations:

As capital preservation is the prime objective of your financial plan, a capital preservation investment strategy has been recommended. The aim of this investment strategy is to provide stable and reliable dividend income from companies that have a minimal chance of bankruptcy. We do this using a fixed weighting approach to asset allocation and implement the moderate alternative to asset allocation as you are happy with minute fluctuations but fear those on a larger scale.

The implementation of this method relies on shares and bonds and includes foreign investments as well as short-term investments. Fixed income securities should make up 30% of your portfolio, bonds should equate to 40% and foreign securities and short term securities should both equate to 15% of your total investment portfolio.

Investment recommendation:

Investment Strategies:

When constructing a portfolio, we consider the following objectives: current income needs, capital preservation, capital growth, tax considerations and risk.

As your current income needs are met and still leave you with a net saving capacity of $39,696.65 left for investments, this is not your primary concern.

Capital preservation is an investment strategy where the primary goal of the investor is to preserve capital and prevent a loss in the portfolio. This is of maximum priority for retirees and those approaching the retirement age (Capital Preservation, n.d). Investors in this situation rely on their investments to generate income to cover living expenses in order to maintain their current lifestyle.

On the other hand capital growth is an investment strategy where the investment increases in value over time. As you currently have no debts or liabilities to cover and do not foresee any change in your expenditure and expect that 50% of your current salary will be more than enough for you both to maintain your current lifestyle, capital growth is not the best suited option. In order to sustain a capital growth investment portfolio the level of risk is increased (meaning there is more chance of a loss) and there is a reduced amount of current income which will prevent you from continuing with your current lifestyle (Capital Growth, n.d). These high risk investments provide much higher returns but there is potential for much larger losses.

As capital preservation is your prime objective in order to have enough money to maintain your lifestyle during your retirement, you are best suited to a capital preservation investment strategy. Based on calculations in the Risk Assessment section of this report after all expenses you are left with $39,696.65 in your net savings capacity which can be used in these investment decisions. Under this portfolio orientation we look to conservative, low risk investments. These low risk investments provide relatively predictable returns.

The aim of selecting the Capital Preservation portfolio is to provide a stable and reliable dividend income from companies that hold minimal risk of bankruptcy.

As you are a high income earner and are currently paying a large amount of tax, tax considerations are also a deciding factor in your investment decision. You may wish to defer taxes and earn investment returns in the form of capital gains (Gitman et al. 2011). Under this portfolio orientation we look to higher risk investments and require a longer holding period.

Portfolio Construction – Asset Allocation:

Now that your specific portfolio objectives have been identified, we can now construct a portfolio designed to achieve these goals. The main objective of asset allocation if the preserve capital through investment in various asset classes (Gitman et al.2011). Prior to buying any investments, you need to develop an asset allocation scheme. This divides your portfolio into the different asset classes – shares, bonds, foreign securities etc.

There are three basic approaches to asset allocation:

  1. Fixed weightings
  2. Flexible weightings
  3. Tactical asset allocation

Fixed Weightings: allocate a fixed percentage of the portfolio to each of the asset categories of where there are typically 3-5. These fixed weightings do not change over time.

Flexible weightings: are periodically adjusted for each asset classed on the basis of market analysis. Changes are triggered by shifts in market conditions or expectations.

Tactical Asset Allocation: is a form of market timing that uses chare index futures and bond futures to change the asset allocations of a portfolio.

As you have decided to take on the investment process yourself and not introduce professional help, I suggest a fixed weighting approach which remains constant and requires no changes.

There are three different ways to determine your asset allocation weightings.

  1. Conservative
  2. Moderate
  3. Aggressive

The conservative approach to fixed weighting asset allocation relies on bonds and short term securities to provide predictable returns.

Moderate allocation relies on shares and bones and includes more foreign investments and fewer short tern securities than that conservative approach.

Aggressive allocation relies on investing more funds in shares, fewer in bonds and more in foreign securities – generally increasing the expected portfolio return and risk.

The different approaches and their asset allocation weightings can be seen below:

Allocation Alternatives

Conservative

Moderate

Aggressive

Category

Low Return/Low Risk

Average Return/Average Risk

High Return/High Risk

Shares

15%

30%

40%

Bonds

45%

40%

30%

Foreign Securities

5%

15%

25%

Short Term Securities

35%

15%

5%

Total Portfolio

100%

100%

100%

Portfolio Recommendations:

Based on the questionnaire we conducted earlier (see client questions and answers), we compiled your risk profile score. Based on this score we found that you belong to a moderate profile of risk. This means you don’t mind minute fluctuations in investment returns, but would be uncomfortable with great fluctuations as security of your investment is paramount. As such I recommend the Moderate Asset Allocation Alternative.

Based on your conservative approach to asset allocation, 30% of capital should be invested in shares and property with the rest being invested in cash or fixed interest securities. An investment of $10,000 after five years will leave you with $12,300 equating to an expected return of 4.2% before fees, taxes and other costs (Super Investment Options, 2015).

Shares:

The benefits of investing in shares include the strong growth potential, possible income arising from the payment of dividends and if your situation changes and you need to access your money they can be bought or sold quickly (Choosing Investments To Suit You, n.d). These shares are suitable if you’re looking to supplement or replace an income ie. When you are approaching retirement. Property is also of a great benefit to your situation as it is a long term investment and can possible result in rental income from investment properties. 30% of capital should be allocated to this asset class.

The timeframe over which the capital is to be preserved determines the blend of investments to undertake. For longer capital preservation periods, fixed income securities which includes bonds that are highly rated by a credit ratings agency are best suited.

A well-diversified portfolio compiled of five leading companies which provide the potential for regular dividend income are listed below. Each company is listed in the ASX top 50 listed companies. In order to diversify your investment we have distributed suggested shares purchases amongst different sectors. As we have $39696.65 in our net saving capacity, 30% of this ($11,908) should be invested in these shares.

Andrew & Margaret’s Share Portfolio

Number of Shares

Company

Current Price Per Share

Current Value

Annual Dividend Per Share

300

Santos Limited (STO)

$4.430

$1,329

$0.15

300

Telstra Corporation Limited (TLS)

$5.730

$1,719

$0.15

300

Coca-Cola Amatil Limited (CCL)

$9.300

$2,790

$0.33

150

National Australia Bank Limited (NAB)

$30.600

$4,590

$0.99

300

Insurance Australia Group Limited (IAG)

$4.930

$1,479

$0.16

Bonds:

40% of capital should be allocated to fixed interest bonds. The benefits of fixed interest bonds include the payment of regular interest at a higher rate than that of cash investments, predictable returns and the ability to buy or sell quickly in the event that you need to access your money (Choosing Investments to Suit You, n.d).

You should prefer to invest in companies that are deemed to be undervalued with established, proved business models, a record of recurring earnings and dividends, conservative balance sheets and competent, ethical and shareholder-focused management and directors.

As we are looking for investment capital for a longer time horizon as you are 15 years away from the retirement age, we look to those choices that provide longer time horizons. An example of a security that would be suitable in your situation is 10 year Australian Commonwealth Government bonds. Even though the yield on these bonds is only equal to 3.5% per annum, the likelihood of an investor getting their capital back is high probable (Investment Strategy, 2014).

Based on your allocation method are allocating 40% of capital to fixed interest bonds (14,787.86).

Fixed Rate Government bonds that are currently available for purchase are listed below:

Bond Price

Coupon Rate

Maturity

Treasury Bond 3.25%

$105.50

3.25% paid semi annually

21/04/2022

Treasury Bond 4.75%

$121.17

4.75% paid semi annually

21/04/2022

Corporate bonds should also be considered as they provide regular interest payments from the issuing company for the lifetime of the bond with the principal amount being repaid on maturity

Bond Price

Coupon Rate

Maturity

Westpac FYM3QUT

$102.49

90-day bank bill swap rate plus 2.5% paid quarterly

23/08/2022

NAB Subordinated Notes (NABHB)

$102.00

90-day bank bill swap rate plus 2.5% paid quarterly

18/06/2022

Foreign Securities:

An allocation of 15% of capital should be allocated to these foreign securities ($5,545).

Short Term Securities:

For shorter capital preservation periods, cash investments and bank term deposits are preferred.

A bank term deposit allows you to secure your money with a fixed interest rate for a set term (from one month to five years) (Different Types of Investments, n.d). The interest rate paid for amounts deposited into the term deposit account depend on the term of the account. An allocation of 15% of capital (36969.65) should be allocated to these short term securities ($5,545) See the below table for more information:

Term

Interest Rate for $5,000 to $49,999

Interest Payments Made

60 Months

2.80% per annum

Annually

36-47 Months

2.60% per annum

Annually

12 Months

2.35% per annum

At the end of the term

8 Months

2.40% per annum

At the end of the term

4 Months

2.35% per annum

At the end of the term

To maximise the amount of interest earned on money deposited in the term deposit, the entire allocation amount of $5,545 should be invested for the 60 month term as this provides a higher rate of interest and interest payments are made more frequently than the shorter term periods.

Tax Effect:
Investors who earn interest income are required to pay tax. Share investors are given franking credits on the dividend income for the income taxes already paid by the corporation. Share investors like yourself also receive a gain in the value of their shares knows as capital gains of which only half is taxable. Capital gains are only realised through the sale of the shares when sold at a profit (ie. At a higher price than when it was originally purchased). If the shares are not sold and held by the investor, no capital gain tax is recognised. This allows you to defer tax payments as well as control their timing as tax is only payable on the sale of the shares.

References:

Simple Tax Calculator, Australian Taxation Office, viewed 3rd October 2015, <https://www.ato.gov.au/Calculators-and-tools/Simple-tax-calculator/>

Capital Preservation, Investopedia, viewed 3rd October 2015, <http://www.investopedia.com/terms/p/preservationofcapital.asp>

Capital Growth, Investopedia, viewed 3rd October 2015, <http://www.investopedia.com/terms/c/capital-growth.asp>

Gitman, L, Joehnk, M, Juchau, R, Donald, G, Wright, S 2011, Fundamentals of Investing, Pearson Australia, Australia

Super Investment Options, ASIC’s MoneySmart, viewed 3rd October 2015, <https://www.moneysmart.gov.au/superannuation-and-retirement/how-super-works/super-investment-options>

Choosing Investments to Suit You, Commonwealth Bank of Australia, viewed 3rd October, 2015, < https://www.commbank.com.au/personal/can/investing-your-money/choosing-investments-to-suit-you.html>

Investment Strategy: Objective Based Investment Strategy, National Australia Bank, viewed 3rd October 2015, < http://business.nab.com.au/investment-strategy-objective-based-investment-strategies-7931/>

Different Types of Investments, Commonwealth Bank of Australia, viewed 3rd October 2015, < https://www.commbank.com.au/personal/can/investing-your-money/different-types-of-investments.html>

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