Posted: May 15th, 2024

FIN 450 : Investment Portfolio Analysis

FIN 450 Project Profiles

Kayla is a 29-year-old single female who just graduated from medical school and is starting her career as a doctor. Her annual salary is $150,000. She wants to pay off her $100,000 student loan debt (average debt rate 6%) quicker, so she reduced her cash savings. She contributes to her employer-provided 401(k) plan at a 6% contribution rate. The employer provides a match on the initial 6% contribution. She knows that the IRS 401(k) maximum contribution of $22,500 in 2023 is expected to rise to $23,000 in 2024. She understands that she is not taking full advantage of the 401(k) contribution tax deferral opportunity since her 6% contribution of $150,000 is roughly $9,000 annually. (For most individuals, every dollar invested in their 401(k) now means a dollar of income not taxed now and instead taxed later, preferably in retirement when personal taxes are generally lower than the rate in working years.) However, she has contributed to an IRA account annually for a few years, including $6,500 in 2023. She anticipates contributing the 2024 limit of $7,000. Kayla earns too much income to use the IRA contributions as tax deductions, but she does live in Florida—a state with no income taxes. Kayla’s reasoning behind her decision to contribute to an IRA account instead of contributing the maximum possible annual contribution to her 401(k) is that her IRA account, which is provided by a national bank, allows her to invest in individual stocks, similar to a traditional brokerage account, while the 401(k) plan allows only for investments in mutual funds, exchange-traded funds, and diversified baskets of stocks and bonds. She also has a trading account with the same bank where she maintains the IRA account. All assets held in the three accounts are listed below.
While she is generally conservative when it comes to making risky investments, she has a newfound understanding that growth requires taking risk, and that she can raise her risk profile because of her age and what is expected to be rapidly increasing income throughout her career. Now that she has a full-time job, she plans to increase her retirement savings while maintaining contributions to the IRA and investing in her trading account. She has tried to become more educated about the markets and understands that while prior return does not guarantee future performance, she would like to generate the same annual return as S&P 500 during the last 10 years. Because her expenses are modest, her student loans should be paid off in 10 years. She also hopes to open her own practice once her student loans are paid off and would like to build up enough assets, some in more liquid assets, to fund the start-up costs. Another reason for paying down debt and getting her finances in order is to improve her credit score, so she can access business debt funding for her future practice.
Asset Account Ticker Size ($)
Cash Bank Savings N/A $15,000
Vanguard Intermediate-Term Treasury ETF 401(k) VGIT $25,000
Vanguard Total Stock Market ETF 401(k) VTI $15,000
BlackRock Equity Dividend Fund 401(k) MADVX $15,000
Johnson & Johnson IRA JNJ $6,500
Pfizer IRA PFE $6,500
Bank of America IRA BAC $6,500
Walmart Trading/Brokerage WMT $3,000
CVS Health Trading/Brokerage CVS $4,000
Total $96,500

Jason and Elizabeth are a professional, college-educated couple. They are both 47 years old and reside in California with their two children, ages 18 and 13. Jason is an attorney who practices corporate law at a small niche law firm. His firm focuses on patent law for the technology industry and has clients mostly in the Silicon Valley of Northern California. Elizabeth is a freelance software developer, under a two-year contract with Google. While their total household income varies due to Elizabeth’s employment opportunities, on average, the couple makes a gross annual income of $350,000–$400,000. While the couple does not have any student debt, the cost of housing is high in California. The couple has a large mortgage payment and California has a state income tax rate topping out at 13.3%, with most middle-class Californians paying an income tax rate in the range of 6%–9.3%.
The couple is busy now as they prepare for their oldest child to start college. They prioritized investments, an expensive mortgage to live in a comfortable house, and generally avoiding debt over the years (meaning most of their large purchases were made with cash). Jason and Elizabeth did not save for their children’s college education, which means they will be paying large portions of the children’s college expenses out of pocket. The couple has put aside extra cash for this purpose (invested in a 4% 5-year CD), but two children attending college over four years means expenses in addition to the money already set aside. They expect annual cash outlay during their children’s college years, which also would diminish their financial flexibility and ability to save for the future.
When it comes to savings and retirement, the couple has accumulated a comfortable, but what they consider statistically insufficient, nest egg of $1.2MM. None of their jobs over the years have offered traditional 401(k)s, so Jason and Elizabeth have simply invested in the stock market through online brokerage accounts. The couple’s proximity to and knowledge about the tech industry has meant that they have been long-term investors. They have been solely concentrated in tech stocks.
While this approach has been rewarding over the long term, they are now considering a more diversified investment portfolio in the future due to two factors:

A rising rate environment has created market volatility in the stock market lately, especially for technology stocks.

They will both be turning 50 soon, which has made them realize that they have a shorter productive period left in life to accumulate assets or to recover from losses (although they both plan to work for another 15 years).
Despite a planned slow reduction in risk profile, the couple will aim to outpace the average annual return of the S&P for the last 10 years and attempt to generate average annual returns closer to those of the NASDAQ during the last 10 years. Despite the latest market developments and expectations of lower returns for the next 10 years in the markets due to the emergence of higher interest rates across the globe, multiple large-scale conflicts slowing down the global economy, and reduced valuations in the tech sector, the couple is aiming for this above-average return because they are emotionally driven by a “recency bias.” Recency bias is believing that the latest event—in their case generating above-average tech stock returns—will keep happening in the future and only considering the latest events while ignoring historical averages. Their retirement plan counts on excess returns above market average returns to achieve a comfortable retirement lifestyle.
Asset Account Ticker Size ($)
Cash 1-Year CD N/A $80,000
Meta/Facebook Trading/Brokerage META $200,000
Amazon Trading/Brokerage AMZN $150,000
Palantir Technologies Trading/Brokerage PLTR $130,000
Apple Trading/Brokerage AAPL $180,000
Google Trading/Brokerage GOOG $220,000
CrowdStrike Trading/Brokerage CRWD $120,000
NVIDIA Trading/Brokerage NVDA $100,000
Palo Alto Networks Trading/Brokerage PANW $100,000
Total $1,280,000

John and Barbara are in their early 70s. They both retired not long ago. John, a retired Army Captain, ran a small but successful defense contracting company and Barbara managed the office. They sold the practice prior to moving to Colorado to be closer to their grandchildren. Due to investments over the years and proceeds from the sale of the business, the couple has accumulated $4.5MM in savings. They intend to leave some of the funds to their children and grandchildren when they pass. For now, they plan to enjoy an exciting retirement lifestyle. However, with possible life expectancy for another 20 years, expensive all-year-round travel, a new house and mortgage in Colorado, and rising healthcare costs, they are worried that they will run out of money or that they will not be able to pass on much of their wealth to family members. While a portion of their portfolio is invested in high-paying dividend companies to produce income, as their wealth increased, they have aggressively invested other portions of their portfolio. The portfolio has grown largely because of the risks they have taken, including gold and cryptocurrency. They feel comfortable giving up some risk if changes provide them with more income to support expenses and still grow their portfolio above the rate of inflation, generating at a minimum 5% annually to slow down the drawdown on the portfolio. They also want tax-efficient investments because their entire portfolio is in non-retirement accounts and highly taxed every year on income and growth, which means they realize capital gains because of the high growth in risky investments.
Another consideration is the transfer of inheritance to family members. They have a will and know how any remaining assets should be divided among family members, but the couple has not pursued any organized estate planning to establish the most tax-efficient method. They are interested in consulting with an attorney or financial advisor about the issue and have expressed preference for transferring the actual financial assets to grandchildren instead of cash because they believe stocks, bonds, and other similar securities will have longevity and accrue in value. They also think that perhaps transferring securities instead of selling the assets and distributing cash may help to create a more tax-efficient inheritance distribution.
Rising rates in the bond market have also made the couple reconsider concentrating investment in high-dividend-paying stocks for two reasons:

Treasury bond rates in excess of 4% create a source of steady income with very little credit risk at a level comparable to dividend yields generated from their stock holdings (potentially pursuing a classic 60/40 mode, with 60% in stocks and 40% bonds).

High-dividend-paying stocks tend to have low growth rates and react like fixed-income products, with rising rates diminishing their valuation. In contrast, bonds would also be subject to similar conditions; with bonds, you can choose a maturity date, while stocks are perpetual and never mature.
The couple does have some investments in preferred stocks that they would consider switching over to treasury bonds, but they are not certain about the tax implications of earning income through coupon payments from bonds rather than dividend payments through common and preferred stock.
Asset Account Ticker Size ($)
Vanguard Money Market Investor Fund Trading/Brokerage VUSXX $310,000
IBM Trading/Brokerage IBM $390,000
Verizon Communication Trading/Brokerage VZ $300,000
Fidelity Information National Services Trading/Brokerage FIS $500,000
Kinder Morgan Trading/Brokerage KMI $500,000
Chevron Trading/Brokerage CVX $500,000
3M Trading/Brokerage MMM $500,000
Ishares Preferred & Income ETF Trading/Brokerage PFF $500,000
Bitcoin Trading/Brokerage XBTUSD $500,000
SPDR Gold Shares Trading/Brokerage GLD $500,000
Total $4,500,000
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Comprehensive Financial Planning Strategies for Different Life Stages
Introduction:
Financial planning is a crucial aspect of ensuring long-term financial stability and achieving life goals. The needs and strategies for financial planning vary depending on an individual’s life stage, income, and personal circumstances (Kagan, 2021). This article explores three distinct financial profiles, each representing a different life stage and financial situation. By analyzing their current financial standings and future aspirations, we provide tailored recommendations to optimize their financial planning strategies.
Profile 1: Kayla – Early Career Financial Planning
Kayla, a 29-year-old single female, has recently graduated from medical school and started her career as a doctor with an annual salary of $150,000. Her primary financial goals include paying off her $100,000 student loan debt and increasing her retirement savings while maintaining a conservative investment approach (Bhardwaj et al., 2020).
Recommendations:

Maximize 401(k) contributions: Kayla should consider increasing her 401(k) contribution to take full advantage of the employer match and tax deferral benefits (IRS, 2023).
Explore student loan repayment options: Kayla can research income-driven repayment plans or loan forgiveness programs for medical professionals to manage her student loan debt effectively (Federal Student Aid, 2021).
Diversify IRA investments: While individual stocks offer growth potential, Kayla should consider diversifying her IRA portfolio to include a mix of mutual funds and exchange-traded funds (ETFs) to balance risk and returns (Ibbotson et al., 2018).

Profile 2: Jason and Elizabeth – Mid-Career Financial Planning
Jason and Elizabeth, both 47 years old, are a professional couple residing in California with two children. With a combined annual income of $350,000-$400,000, their primary financial concerns include funding their children’s college education, diversifying their investment portfolio, and planning for retirement (Sahadi, 2022).
Recommendations:

Establish a college savings plan: Jason and Elizabeth should consider opening 529 college savings plans for their children to save for education expenses while benefiting from tax advantages (Savingforcollege.com, 2023).
Diversify investment portfolio: To reduce risk and potentially increase returns, the couple should consider diversifying their portfolio beyond tech stocks by including a mix of domestic and international stocks, bonds, and alternative investments (Vanguard Advisers Inc., 2023).
Maximize retirement contributions: Jason and Elizabeth should explore options to maximize their retirement savings through IRAs, SEP-IRAs, or self-employed 401(k) plans, depending on their employment status and eligibility (IRS, 2023).

Profile 3: John and Barbara – Retirement Financial Planning
John and Barbara, in their early 70s, have recently retired and relocated to Colorado. With a substantial portfolio of $4.5 million, their primary concerns include maintaining their lifestyle, minimizing taxes, and efficiently transferring wealth to their family members (Garber, 2023).
Recommendations:

Implement a tax-efficient withdrawal strategy: John and Barbara should work with a financial advisor to develop a tax-efficient withdrawal strategy that minimizes the impact of taxes on their portfolio while ensuring a steady income stream (Fidelity Investments, 2023).
Consider estate planning tools: The couple should consult with an attorney or financial advisor to explore estate planning tools such as trusts, gifting strategies, and beneficiary designations to minimize taxes and ensure a smooth transfer of assets to their heirs (Cornell Law School, 2021).
Rebalance portfolio for income and growth: John and Barbara may benefit from rebalancing their portfolio to include a mix of dividend-paying stocks, bonds, and alternative investments that provide a balance of income, growth, and risk management (Vanguard Advisers Inc., 2023).

Conclusion:
Financial planning is a dynamic process that requires regular review and adjustment based on an individual’s evolving life circumstances and goals. By understanding the unique challenges and opportunities presented at each life stage, individuals can develop comprehensive financial strategies to achieve their short-term and long-term objectives. Seeking guidance from financial professionals and staying informed about the latest financial planning tools and strategies can help individuals navigate the complexities of personal finance and secure a stable financial future.
Bibliography:
Bhardwaj, S., Sharma, S., & Sharma, V. (2020). A study on financial planning for young adults. International Journal of Management, 11(6), 1-9.
Cornell Law School. (2021). Estate planning: An overview. Legal Information Institute. https://www.law.cornell.edu/wex/estate_planning
Federal Student Aid. (2021). Income-driven repayment plans. U.S. Department of Education. https://studentaid.gov/manage-loans/repayment/plans/income-driven
Fidelity Investments. (2023). Tax-smart investing strategies. https://www.fidelity.com/learning-center/personal-finance/tax-smart-investing
Garber, J. (2023, February 21). 5 retirement planning strategies for high-net-worth individuals. Forbes. https://www.forbes.com/advisor/retirement/high-net-worth-retirement-planning/
Ibbotson, R. G., Milevsky, M. A., Chen, P., & Zhu, K. X. (2018). Asset allocation and longevity risk. Financial Analysts Journal, 74(4), 10-27.
Internal Revenue Service (IRS). (2023). Retirement topics – 401(k) and profit-sharing plan contribution limits. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
Kagan, J. (2021, November 15). Financial planning basics: How to create a financial plan. Investopedia. https://www.investopedia.com/articles/personal-finance/090916/how-create-financial-plan.asp
Sahadi, J. (2022, January 11). How much should you have saved for retirement by age 40? CNBC. https://www.cnbc.com/2022/01/11/how-much-should-you-have-saved-for-retirement-by-age-40.html
Savingforcollege.com. (2023). What is a 529 plan? https://www.savingforcollege.com/intro-to-529s/what-is-a-529-plan
Vanguard Advisers Inc. (2023). Portfolio management: Balancing risk and return. https://investor.vanguard.com/investing/learn-about-investing/portfolio-management

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Study Notes & Homework Samples: Module 6 Assignment: Traditional Project Analysis »CFIN Evaluate this proposed new project by calculating the payback period