The purpose of this project is to discuss and develop investment strategies for three individuals who are at different stages in their personal and financial life and who have very different investment goals. This is accomplished by requiring each student to allocate $100,000 for three different investors. This objective is achieved by: (1) an assignment and (2) a term paper/project
The assignment requires that each student fill in Worksheet 1 and discuss their recommendations for all three clients' prequisites, goals, risk levels, and strategic allocation in a group setting. The term paper requires that each student present supporting argument for their recommendations one client including the tactical allocation of the $100,000 (include Worksheet 1 and Worksheet 2 as appendixes to paper which is outlined below). You will be assigned one of three cousins as your client.
The current investment environment is relevant to the allocation of these funds. At least five current articles should be cited and properly referenced to support your recommendations. Listing specific companies or mutual funds is not required; however, specific companies or funds can be used as examples of the type of investments you are recommending. What is required is the type of investment vehicle (e.g., growth stock, balanced mutual fund, AAA bonds, etc.).
Background:
On January 25, 2001 Charles Austin Vaughn died leaving each of his three cousins $100,000 as an inheritance. The three cousins have come to your firm for advice on how they should invest their inheritance. A brief description of each investor is provided below. Some unaudited financial documents are also provided in an Excel file (Table 1 and Table 2).
Determine how the each client's inheritance should be invested given their current financial situation and investment goals. That is, you will fill out Worksheet 1 for all 3 cousins and write a paper that supports your financial recommendations for one of the three cousins..
A brief description of each cousin and his/her family is presented along with tables listing each client's income, expenses and net worth. Make any additional assumptions you feel necessary within the confines of the project description and the current economic situation. However, the impact of each assumption on your recommendations should be discussed in the paper.
Description of Heirs:
The first cousin named in the will is Alex Vaughn. Alex is 24 and unmarried. He has been working as a systems analyst for a large defense contractor in Washington, D.C for the last 2 years. Alex currently earns $40,000 per year. Alex rents a modest one bedroom apartment in northern Virginia for $950 a month. Alex just purchased a mostly new BMW convertible and is the proud owner of a $700 a month car payment schedule for the next 60 months (automobile loan has a nominal annual rate of 10 percent). Alex currently maintains a balance of $3,500 on his Citibank Visa which charges a rate of 1.283% per month, ($32 minimum monthly charge). Alex also is making a $110 per month payment on his student loans which has a current balance of $8,000 and a nominal annual rate of 8 percent. Alex is usually short on cash because he frequents bars in Georgetown and Old-town Alexandria. Alex also likes to go to the islands on 3 day weekends during the winter. Each trip costs about $750. Alex's two big dreams are to own a yacht (current cost of $100,000) and to travel to Europe with one of his friends. His good friend Hal, the travel agent, told Alex that he could arrange such an excursion for £8,000 (British pounds). Alex has no immediate plans for marriage, and he does not plan to consider marriage until after becoming one of "them" (over 30). His company does provide Alex with a $200 deductible Blue Cross/Blue Shield (Health Insurance) Plan with an 80/20 coinsurance clause; however, Alex does not carry any life insurance. Alex's company provides him with defined benefit retirement plan; however, Alex will not be vested until after his fifth year of employment.
Susie is the second cousin listed in the will. She is married to Joe Lucas. Both Susie and Joe are 32 and have been very busy. Joe and Susie have four children ages 9, 8, 4, and 1. Joe earns $45,000 a year as a financial analyst for an oil company. They currently are living in Houston, Texas in a house that they are buying. The house payments are $1,100 per month, and there are only 324 payments left on their mortgage which has a rate of 11.0 percent ($300 of the monthly payment is for escrowed taxes and insurance). Susie has her hands full at home and running "Mom's taxi service" for their kids' various activities, (e.g., dance, football, volleyball, etc.). Susie has a degree in elementary education but has not been employed since graduating from college. Joe and Susie have $5,000 in a money market mutual fund. Joe's employer provides a $25,000 term life insurance policy. Health care is provided by an HMO which is also a fringe benefit from Joe's employer.
Joe's employer provides a matching 401(k) retirement plan. The plan provides Joe the choice of several accounts: (1) fixed annuity, (2) stock in the oil company, (3) stock fund that invests in only S&P 500 firms, and (4) a balanced fund that consists of 50 percent U.S. bonds and 50 percent S&P 500 firms and (5) money market fund. Transfers among the funds are allowed in $1,000 denominations. However, Joe has always elected to put contributions into the fixed annuity account which currently is yielding 6.0 percent. Joe currently contributes $100 per month to the plan. Joe's current vested fund balance is $5,000.
The next major purchase Joe and Susie want to make is a new mini-van (cost $30,000). They want to keep their 1996 Honda as a second car and trade in their 1989 Subaru Legacy station wagon. Because of the number of children, it is very difficult to save more than $200 per month. Joe and Susie's dream is to send each of their children to college. Since neither Joe nor Susie is athletic, the possibility of an athletic scholarship is very small. However, they wonder how much they will need to save for their kids' education and if they can afford it. Joe and Susie would also like to take an educational vacation to Europe with the kids. Hal, Joe and Susie's travel agent, has priced a trip to France, Italy and Greece at DM 25,000 German marks.
Agnes Sullivan is the third cousin. She is 56 and married to Pete who is 59. Agnes and Pete reside in Fargo, North Dakota. Agnes is a part-time real estate agent and earns between $15,000 and $30,000 per year depending on the economy. Pete is a foreman for a small construction company and earns $35,000 a year. In May, the last of their three children graduated from college. Each of their children is now gainfully employed and no longer needs their financial support. However, Agnes and Pete still owe $20,000 on a second mortgage taken out to pay for their children's college education. There are 126 monthly payments of $235 remaining on the second mortgage loan. Agnes and Pete plan to retire and move to Phoenix, Arizona when Pete becomes eligible for social security (age 62). At that time they plan to sell their house currently valued at $65,000 and buy a new home in Phoenix for about $100,000.
Agnes and Pete's oldest son is currently leaving Calgary, Canada. Agnes and Pete plan to visit their son and his family during the summer and then drive on to Alaska on the Alaskan-Candian Highway. They have estimated that during their vacation they will spend about $2000 in Canadian dollars and about $2000 in US dollars while on vacation. During their retirement, the Sullivans plan to spend 40 to 50 days a year traveling across the U.S. and Canada in a 25 foot motor home. The current cost of the R.V. is $35,000. Pete and Agnes each have a cash value of $10,000 in paid-up whole life insurance policies. They pay $700 per month for health insurance that does not have a deductible. The Sullivans do not own any common stock or bonds, but they do have $25,000 in a savings account at the First National Bank of Fargo. Neither of the Sullivan's employers offer retirement benefits; however, for the last 15 years Pete has been contributing $2,000 per year to an IRA account that has yielded 8 percent per year. Pete started making monthly contributions of $166.66 at the beginning exactly 15 years ago.
Your assistant has provided you with some additional information
about each of your clients (Be aware that your assistant is an intern and
has been know to make errors when creating financial statements of the
clients):
If your client is Susie--
How will the blend of assets for the Lucas family differ between their
retirement and their education portfolios? Should their existing assets
in the 401(k) be reallocated?
If your client is Agnes--
How would the allocation for Agnes and Pete change if they adopted
their 8 year old grandson?
Be sure to provide support for your recommendations or a discussion explaining why you disagree with recommendations by the financial press. Information obtained from television broadcasts will count as a citation; however, you are limited to one of these (e.g., Wall Street Week, Fridays at 8:30 p.m. on PBS; or National Business Review, weekdays at 5:30 p.m. also on PBS or CNBC programs). However, when using a non published source, you must have the speakers full name, credentials and current position.
Guidelines for written report for Investment Strategy Project
Step 1: Read the following: