Case Scenario:
How do I arrived at the various answers for these recommendations and questions on investments for James O'Hara, an ABC client, is a single, 37-year-old, self-employed plastic surgeon who currently owns a condominium in Tiburon, CA, worth $1.4 million. James is doing quite well financially. His gross income from his practice last year exceeded $350,000. Upon graduation from medical school, he began investing in stocks and opened an IRA. He made his selections mostly on the basis of articles he read describing good investment opportunities in various personal finance magazines. Because of his hectic schedule, Dr. O'Hara has seldom taken the time to evaluate his portfolio performance, but he feels it is not quite up to par.
Dr. O'Hara currently has about $350,000 in investable funds with about $130,000 currently invested in several stocks at a local discount brokerage house, as well as an IRA account funded with three mutual funds that are currently worth about $170,000. After working with a staff financial planner and investment advisor at ABC, the following investment strategies have been drafted for Dr. O'Hara based on his financial needs and objectives:
• Dr. O'Hara will contribute the maximum allowable yearly contribution to his newly established private practice 401(k) plan, which will also be managed and monitored by ABC. The account is to be funded with only one well-performing mutual fund. The fund investment objectives must include the ability to earn market returns consistently and minimal yearly management fees.
• A sum of $30,000 is to be earmarked for Dr. O'Hara's upcoming wedding and honeymoon trip in June of next year. Dr. O'Hara wants this portion invested in a very safe place with no expense, sales, or early withdrawal charges.
• Dr. O'Hara is also planning to assist his nephew with medical school expenses in 3 years. To this end, he wants $60,000 earmarked in an account with higher than current certificate of deposit or money market rates but minimal market volatility.
• Dr. O'Hara's average, long-term (5 years and on) minimum required rate on equity investments is 9%.
Dr. O'Hara's risk tolerance questionnaire indicates that he is a moderately aggressive investments
1. Construct an asset allocation model for Dr. O'Hara given his financial objectives and risk tolerance level.
o Explain and defend the rationale behind recommending the model.
o The asset allocation must have between 3 and 5 asset classes.
2. Recommend a suitable investment alternative for Dr. O'Hara's wedding and his nephew's tuition assistance objectives.
o Thoroughly explain and defend your recommendations.
3. Recommend a suitable mutual fund for Dr. O'Hara's 401(k) plan. Provide detailed information about the fund, including the following:
o The name of the fund
o Its portfolio manager's name, experience, and qualifications
o Its investment philosophy and strategy
o How long this fund been in existence
o Its current NAV
o Its yearly management fees, which must not exceed 1% of amount invested
o The fund's 1-year, 3-year, and 5-year returns*
An assessment of some of the risks involved in investing in this fund