section 1 - The American College Online Learning Center

c. Example 2: If clients want a laddered portfolio with a 10-year time horizon, thenthere are 10 different holding periods, and each anniversary date becomes adesired holding period. The easiest way to immunize the portfolio is to buyzero-coupon bonds whose maturities match the desired payoff dates. The reasonis that a zero-coupon bond is the only one in which the duration statistic exactlymatches the maturity. So, if one wanted a 10-year bond ladder, it would be moreefficient to buy zero coupon bonds with the 10 different maturities than to buycoupon bonds whose maturity matches the desired payoff dates.d. The immunization strategy solves the investment risk problem in most casesbecause government and highly rated (e.g., AAA) bonds seldom default.e. The immunization strategy may not help with reinvestment risk when the client isusing coupon bonds and planning to reinvest the coupons.f. The immunization strategy using government bonds will help with liquidity risk.g. An immunization strategy that uses thinly traded bonds will hurt the client’sliquidity risk.3. Consider all retirement assets in the asset allocation model.a. Asset allocation must be matched to the client’s risk tolerance.b. Many clients become more risk averse as they enter and live through retirement.c. Tell clients the exposure in the investment portfolio is only a percentage of theirentire portfolio.d. A portfolio that only factors in investable assets may underrate the potential forequity investments. The portfolio should factor in Social Security, annuities, andhousing equities.e. Example: Don has the equivalent of a net present value of $300,000 in SocialSecurity. He also has $300,000 in home equity and $1,400,000 in an investmentportfolio. If Don feels a 60 percent equity position meets his risk aversion profile,he should invest $1,200,000 in equities (which is 60 percent times his entireportfolio of $2,000,000), rather than $840,000 in equities (which is 60 percenttimes his liquid investment portfolio of $1,400,000).f. This will help the clients who need more exposure to equities to accept thatexposure.4. Diversification and age-appropriate investments.5. Other strategies that help to impede the risk of holding investments in retirement include:a. Recommend that the client delay starting retirement. Postponing retirementmay allow a client to stockpile more investment assets in a 401(k) plan. Theseadditional assets might serve as a hedge against investment losses.b. Recommend that the client go back to work full or part time. Reemployment maygive the client the extra income needed to offset investment losses.c. Ensure that the client is receiving professional advice by working with a financialplanner or planners. Too often clients are ill equipped to manage their portfolio.Professional advice can help a client avoid asset allocation mistakes.d. Monitor the retirement income plan and lower spending if necessary. Plannersshould monitor plans at least annually and adapt expenditures to make sure fundsare not exhausted because of the risks associated with portfolio management.e. Relocate to an area with a lower cost of living. This will work best to hedgeagainst investment losses.6. Recommend an appropriate strategy to convert assets into income.5.25