This is why I will not do good on the individual investor secton. Given the situation, I picked C as the most appropriate choice. Guess what, answer says that A is a better choice because capital invasion is OK! What??? I am not saying capital invasion is not OK, all this time, we are told and taught to do the best to preserve capital…now, in this question. Capital invasion is OK? WFT!!!
you overlooked the fact in this case the expected life of the portfolio is 5 - 10 years which is the key factor from the IPS in this question. Generally you are correct - preserve the real value of the portfolio, but that usually is because we are dealing with mutli-stage time horizons that combined are 20-40 years in length. In this particular question we have a 5-10 year time horizon (given) and a low risk tolerance (given i believe) so we know that because of the short time horizon and no real goals for passing on the wealth that eating into the portfolio’s value is ok. however, we should also note somewhere that outliving the assets is a real risk with this particular strategy.
strikershank Wrote: ------------------------------------------------------- >however, we should also note > somewhere that outliving the assets is a real risk > with this particular strategy. Well, I did look at the fact they have 5-10 years left…well, using 10 yr, is that still classifed as long-term? Outliving one’s asset is certainly a risk need to consider. You know what I have learned so far. On the exam, try not to have an opinion…otherwise, I will be screwed.
haha - ya, an opinion in this exam will always make the answer wrong. 10 years is boarder line long term, but this question talks about 5 to 10 years so if you look at liquidating principle over 10 years you can accept a lower return. This alings with the risk preferene. And it also aligns with their post-death goals (aka none)…just some subtles with this question that makes it annoying compared to the others (which are also annoyin)
They are all annoying! Thanks!!
Agreed, I am constantly prefacing my thought process when tackling a question with the phrase “For CFA test-taking purposes…”. Another factor I used in coming up with portfolio A as the answer is that given a maximum 10 year time horizon with principal invasion specifically allowed, I calculated that the PV of the inflation-adjusted distribution need over 10 years would be $875,978. That means this couple could put their entire million bucks under their mattress and pull out wads of cash as they needed it and still have about $125K when they died in 10 years! So I went with the portfolio offering the lowest risk of undue loss, port A. But like you said, the key was recognizing use of principal was ok.
I would be reluctant to invade the prinicpal even if every doctor on earth predicted death in x years. Who knows?..what if the person manages to stay around for a longer period. Anyway, need to watch out for CFAI tricks.
Maybe they stated that Dr. Kevorkian (spelling) is goign to assure that they don’t live past 10yrs… Maybe they just left it out by mistake.
bigwilly Wrote: ------------------------------------------------------- > Maybe they stated that Dr. Kevorkian (spelling) is > goign to assure that they don’t live past 10yrs… > Maybe they just left it out by mistake. LOL!!
From a practical standpoint, I would definitely be very conservative in planning principal withdrawals, but that is what a retirement savings is for. Another practical point missed in the question is that people do tend to spend less (outside of health care or LTC) as their health deteriorates in the late stages of life. So the expectation that the Mueller’s will maintain the $180K lifestyle is not realistic, either. But most planners will make conservative estimates anyway. Also consider that the Mueller’s have the $2M on the side. Putting that in a charitable remainder trust could give them additional income if needed and still stay on track to provide the $2.6M pledge to the university if set-up properly. But this goes way beyond the very explicit assumptions of the question. Again, for CFA testing purposes…
Also, if you have concerns state them in your answer
bigwilly Wrote: ------------------------------------------------------- > Also, if you have concerns state them in your > answer Agree…however, I rather write less than more (no more than necessary). One, time factor; second, there is always a chance I can write something wrong
There’s also the chance you could write something correct.
^ahhaha…knowing me! You all have seen what I have written so far. But, thanks for the confidence, Striker!!!
Just be careful how you incorporate your concerns into your answer. CFAI warns against hedging on questions (answer A but justify B). Have you guys seen this?: http://www.cfainstitute.org/cfaprog/resources/essaytips.html Any other advice on the am session from successful L3 takers is also appreciated!
No hedging? I quit!!!
Yeah, I was hoping I could at least buy a put on my score. Say, strike score of 70. I fear I would be deep in-the-money at contract expiration, June 7.