Susan Lussier’s Inherited Portfolio: Does It Meet Her Needs?
Briefly assess Susan’s financial situation and develop a portfolio objective for her that is consistent with her needs.
Susan’s inherited portfolio needs changes to meet her needs because she does not need mutual funds which may be risky, while profits from those investments may be uncertain. She does not need bonds because she is not going to maximize her profits at the moment. In fact, this is another reason why Susan does not need mutual funds as well because mutual funds, in spite of their unpredictable nature, still can bring considerable benefits in a short run. However, taxation concerns discourage Susan to increase her profits at the moment because she has already had to pay off a large part of her profits for taxes. Instead, Susan should have the portfolio that serves to her long-run interests. To put it more precisely, the main objective of Susan’s portfolio is to invest money into common stocks of reliable companies to obtain a substantial capital with low dividends but the high degree of reliability. In such a way, Susan will invest into reliable companies without maximizing her profits at the moment but the price of common stocks should grow to allow her to obtain considerable capital at any moment, when she decides to sell her common stocks.
- Evaluate the portfolio left to Susan by her father. Assess its apparent objective and evaluate how well it may be doing in fulfilling this objective. Use the total cost values to describe the asset allocation scheme reflected in the portfolio. Comment on the risk, return, and tax implications of this portfolio.
The inherited portfolio was definitely balanced because Susan’s father shared investments between bonds, common stocks and mutual funds. In such a way, he apparently aimed at securing his investments. Bond were the most secure investments but with the low profitability. Stocks were a bit more risky but the portfolio brought stable but low dividends in the course of last five years since companies, whose stocks the father owned, paid off dividends during the last five years. At the same time, he probably pursued some greater profits as he invested in mutual funds. Such investments were quite risky because he could not always be certain in the effectiveness of investments in mutual funds but they could bring considerable profits as well as they could fail. Nevertheless, possible losses from the failure of mutual funds investments would be compensated by common stocks and bonds.
- If Susan decided to invest in a security portfolio consistent with her needs’ indicated in response to question a) describe the nature and mix, if any, of securities you would recommend she purchase. Discuss the risk, return, and tax implications of such a portfolio.
On analyzing needs of Susan, it is possible to recommend her investing into bonds and common stocks of reliable companies, who pay off dividends regularly and have stable prospects in the future. Even though bonds may seem to be risky but Susan should not worry about it much because her investments into bonds will be backed up by investments into common stocks. The investments in common stocks should prevail, taking into consideration the unwillingness of Susan to increase her profits substantially at the moment. Susan should invest in common stocks that have low risks and the same strategy she should use while investing in bonds. However, she should be aware of the low profitability of such investments because low risks will bring certain but low profits. Nonetheless, Susan will be able to gain considerable benefits, when she decides to sell her common stocks. At the moment, the low profits from stocks and bonds will allow Susan to minimize taxation and to save her money.
- Compare the nature of the security portfolio inherited by Susan, from the response to question b, with what you believe would be an appropriate security portfolio for her, from the response to question c.
In fact, the security portfolio inherited by Susan does not meet her needs and her portfolio needs changes. The portfolio she inherited is balanced in terms of risks and profits. The inherited portfolio implies high risks and expects high profits along with a part of the portfolio being secure enough to preserve the capital of the portfolio’s owner. Susan needs security mainly not profits at the moment. Hence, her new portfolio will be security oriented. This means that she would focus on common stocks mainly, to minimize risks associated with bonds and mutual funds. In fact, she would minimize her profits since common stocks of reliable companies bring 2-3% of dividends in inherited portfolio, while she may invest on common stocks which have even lower dividends but the price of those stocks may grow in the future.
- What recommendations would you give Susan about the inherited portfolio? Explain the steps she should take to adjust the portfolio to her needs.
Therefore, it is possible to recommend Susan to focus on the investment in common stocks of reputable and reliable companies mainly. She should sell out mutual funds stocks and a part of bonds and transfer her capital into common stocks. In such a way, she will secure her inherited capital and minimize her profits to avoid excessive taxation.
