For JOHN SMITH
An Investment Policy Statement (IPS) serves as a blueprint for your investment strategy and lays the foundation for setting up your portfolio management process. We will follow the portfolio management process that will consist of: * Stating policy objectives and constraints, based on the client’s needs and expectations. * Individual five constraints:
* Creating an investment strategy based on those objectives and constraints. * This will involve determining a suitable allocation of assets between securities including: Cash, Stocks, and Bonds. * Also, we will be diversifying stocks across ten economic sectors including: * Basic Materials
* Capital Goods/Industries
* Consumer Cyclicals
* Consumer Non-Cyclicals
* Lastly, creating a basis to monitor progression as relating to client’s goals and serve as a report card.
The client’s investment policy is less of a passive strategy and therefore has a higher level of risk tolerance. The client’s needs allow him to use a longer time horizon, meaning he does not need to use him funds right now. His main objective is to invest in multiple sectors and spreading out his investments. He is not concerned about maintaining a stable market and the liquidity of his assets, and more on outpacing inflation and his capital appreciation. Based on the Client’s results from the Investment Guideline Survey, we have concluded the best allocation of cash, stocks, and bonds would be a balanced Growth and Income.
Asset Allocation: Balanced: Growth and Income: Asset Class| Long-Term Strategic Asset Allocation| Tactical Asset Allocation Range| Cash & Cash Equivalents| 5.0%| 0-20%|
Bonds| 25%| 5-40%|
Stocks| 70.0%| 50-85%|
TOTAL| 100.00%| |
Liquidity: Liquid assets are not a constraint for this client. His investments are strictly for additional funds. Time Horizon: The client will have no need to significant withdrawals within the next 10 years. As stated above, his needs are for “fun” will use the funds for his children and grandchildren’s future, so the time horizon is not a constraint. Taxes: Client expects returns to be higher than inflation rate. Regulatory: Not an IRA account, therefore there are no regulatory constraints. Unique: Client does not have any unique constraints.
CONSTRUCTION OF STOCK PORFOLIO:
Number of Holdings:20-30 Stocks
Type:Blend of small, mid and large-cap
Position Weightings:Avg: 1-3% and Max: 7%
In my opinion, I think we are in the Trough-Recovery stage of the business cycle. Gross domestic product and consumer confidence is declining. According to the Business Cycle Indicators Handbook, it is expected that cyclical industries in 2010 should be outperforming others. Lastly, consumer sentiment declined slightly from the prior, meaning consumers are less likely to spend.
Procter & Gamble Stock
1. Dividend Discount Model
*Given information: (from MSN Money, S&P 500 Stock Report and Financial Highlights)
Rentention Rate= 1-Payout Rate
g=Rentention Rate x ROE
=54% x 17.589*
D1= D0 x 1+G
= 1.76*x (1+9.49%)
k=(D1/P0) + g
=(1.93/62.73*) + 9.49%
2. Procter & Gamble is the 4th largest corporation in the United States, recently surpassing Microsoft and Wal-mart. P&G has many competitive advantages over other companies. Their ability to acquire...