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10 managing individual investor portfolios (investor characteristics …
10 managing individual investor portfolios
investor characteristics
biases
preferences
perceptions of risk
situational profiling
source of wealth
self-made
more-passive recipients of wealth
measure of wealth
support the lifestyle
covered succession and estate plan
stage of life
ability to accept risk / willingness to assume risk
not necessarily linear
personal circumstances are driving force
foundation phase: above-average tolerance / unable to assume
accumulation phase: increased risk tolerance / clearly willing to assume
maintenance phase: stability increasingly important
distribution phase - tax constraints / efficient wealth transfers
psychological profiling
traditional finance:
rational info-based
dispassionate objectives
max expected utility of wealth
exhibit risk aversion
hold rational expectations
practice asset integration
behavioral finance
a framework
not a neatly categorize
loss aversion
biased expectations
asset segregation
personality typing
: / short client questionnaires
decision-making style: thinking-feeling
risk tolerance: more risk averse-less
methodical: thinking-more
individualist: thinking-less
cautious: feeling-more
spontaneous: feeling-less
:warning: correlation analysis
a predictive link must exist form the questionnaire to the subsequent investment behavior
investment policy statement
client-specific summation
mutually agreed-upon basis for portfolio
setting return and risk objective
should take place concurrently
return
requirement / desire
primary or critical objectives / secondary goals
annual spending / long-term saving goals
income / growth requirements
bonds / stocks and equity-oriented investment
total return approach - annual after-tax teturn
luxury of dealing with surplus
cash flow analysis
risk
ability
quantitative
needs and goals long and short term
how important how serious the consequences
how large shortfall can bear
willingness
subjective assessment
constraints
liquidity
transaction costs
price volatility
ongoing expenses
emergency reserves
negative liquidity events
*positive and external support
illiquid holdings and their role
time horizon
short / intermediate / long
3 / 3-15 / 15-20
single / multistage horizon
taxes
income / gains / wealth transfer / property tax
paid at the end of given measurement period
is assessed periodically throughout the period
tax deferral: low turnover / loss harvesting
tax avoidance: special purpose savings accounts / tax-exempt bonds / estate planning and gifting strategies
tax reduction
wealth transfer taxes:
transfer at death - deferred
/ early transfers - shelter the subsequent growth from taxes
legal and regulatory environment
personal trust
legal entity
English and american law
tool for implementing strategy
revocable trust
in place of or in combination with a will
remains responsible for any tax liabilities
irrevocable trust
immediate and irreversible transfer of ownership
the trust responsible for tax
the family foundation
independent entity
civil law countries
jurisdiction
offshore investment and tax friendly countries
alternative domestic tax strategy
unique circumstances
an introduction of asset allocation
taxable perspective
safety-first rules - downside risk
normal distribution
expected return - n*standard deviations
1 determine that meet the return requirements
2 eliminate that fail to meet risk objectives / tolerance
3 eliminate that fail to satisfy constraints
4 evaluate risk-adjusted performance / diversification attributes
Monte Carlo simulation
in personal retirement planning
the process by which
probability distributions are arrayed
to create path-dependent scenarios
to predict end-stage results
more accurately portrays the risk-return tradeoff
illustrate the trade-offs between the attainment of short-term and long-term goals
provides more realistic modeling of taxes
better suited to assessing multiperiod effects