In Individual IPS questions, you’ll often be asked to highlight what factors increase or decrease the ability to assume risk (e.g 2008 AM, amongst others) One factor that can be used is that the return objective is “low / moderate / high” relative to investable assets. Where “low” is considered as increasing the ability to assume risk, and “moderate” or “high” is considered as reducing the ability to assume risk. So, my question is - what constitutes “low / moderate / high”? Based on past questions I have done I would guess that: Low: Nominal return objective < 8% Moderate: 8% < Nominal return objective <10% High: 10% < Nominal return objective Does this sound right? I remember seeing some guidance in the Schweser books, but I can’t find it. Any thoughts?
They could ask how the return requirement affects risk, but I doubt it. This requires you to calculate the required return correctly. If you came up with the wrong number, you would get that wrong as well as the risk part. If you look at the posts from last year after the exam, just about everyone comes up with a different return. They are more likely to ask how the other factors affect the ability to take risk (age, wealth, portfolio allocation, etc.) If they do ask something about how req’d return affects risk, I would say >10% means a decreased ability to take risk (even though you need to increase risk to get that return), <5% means an increased ability to take risk, and between 5% and 10% has no real impact on the ability to take risk. I would guess just about everyone has a different opinion on this breakdown as well.
heza. thanks… that’s what i’ve been wondering… you need 12% to make living expenses, so you go low risk and make 5%. and live in poverty… i’m thinking go high risk and then there are some government programs that can help you if your investment portfolio does poorly… anyway, that’s at least partially my serious tho
Okay - then why on 2008 AM Q1, do they say that the client has “moderate” expenses relative to investable assets, which reduces ability to assume risk. This is when the return objective is roughly 9.5% (IIRC). hezagenius Wrote: ------------------------------------------------------- > They could ask how the return requirement affects > risk, but I doubt it. This requires you to > calculate the required return correctly. If you > came up with the wrong number, you would get that > wrong as well as the risk part. If you look at > the posts from last year after the exam, just > about everyone comes up with a different return. > They are more likely to ask how the other factors > affect the ability to take risk (age, wealth, > portfolio allocation, etc.) > > If they do ask something about how req’d return > affects risk, I would say >10% means a decreased > ability to take risk (even though you need to > increase risk to get that return), <5% means an > increased ability to take risk, and between 5% and > 10% has no real impact on the ability to take > risk. I would guess just about everyone has a > different opinion on this breakdown as well.
Return isn’t an above avg / avg / below avg type question. Just say: "Generate a (total) return (AT/BT) sufficient to cover: -Ongoing expenses -Future Retirement Expenses -Child Support -College tuition -Charitable Giving -Protect Inflation Adjusted Porfolio Value -Grow Portfolio to X value Risk Investor has (above/avg/below) ability to tolerate risk based upon: -(Substantial) Portfolio Size -Liquidity needs relative to Total Assets -(long) time horizon / ability to recover from S.T. Losses -Ability to increase savings / reduce spending -Ability to go back to work -Income Stability -(high/low) human capital Investor has (below/avg) willingness to take risk based upon: -statements made about risk -Previous investment allocation -Desire to stay away from risky assets -unwillingess to accept a loss > (12%) in a given year Overall Tolerance to risk is (avge) due to (below/avg (willingness)) to take risk -Suggest investor education to reconcile diff where will > ability -Suggest reassessment of (retirement spending level) -Discuss R/R objectives w/ client in order to come to more realistic objectives Risk Objective is to invest portfolio assets as to (minimize the probability) that portfolio assets (fall more than (12%)) in any given year. Time Horizon Investor’s time horizon is (long term) and (multi-stage) consisting of (3) stages -Time until (major expenditure period begins) ( consisting of X years) -Time until retirement (20-25 yrs) -Time until (major expense ends) -Retirement, consisting of approx (20 yrs) -“Additional TH may be considered if (children attend college)” Liquidity Provide liquidity sufficient to support: -Immediate Expenditure (if it comes out of portfolio and income) -Ongoing Living Expenses (of $X) (which increases with inflation) -One-time Expenditure (of $X, occuring in X yrs) -3 month cash reserve for emergencies -“There will be no major outflows from portfolio until (retirement)” Tax -Investment Portfolio is taxed at (15%) for CG and (25%) on Income -Investments grow (tax deferred in 401k) (withdrawals subject to (25% income tax)) -“Invest in low-yielding securities to take advantage of lower CG rate” -Large portion of Portfolio is invested in (low basis holding) which (must be (hedged)(sold)) *Invest assets w/ intent of deferring or eliminating taxes to the extent possible Legal -Consider Insider Status -PIR for advisory, trusts, etc -“Consult w/ legal expert regarding estate planning” Unique -Any significant asset requested to be ignored -Any future windfall we’re told to ignore -Any stated restrictions on certain investments -Large low-basis holding MAY be considered Well, didn’t intend on writing all that… just kept going through the notes. I think that pretty much sums up Individual IPS. Does that help answer this question at all??
McLeod81 Wrote: ------------------------------------------------------- > Return isn’t an above avg / avg / below avg type > question. > > Just say: > > "Generate a (total) return (AT/BT) sufficient to > cover: > > -Ongoing expenses > -Future Retirement Expenses > -Child Support > -College tuition > -Charitable Giving > -Protect Inflation Adjusted Porfolio Value > -Grow Portfolio to X value > > > Risk > Investor has (above/avg/below) ability to tolerate > risk based upon: > -(Substantial) Portfolio Size > -Liquidity needs relative to Total Assets > -(long) time horizon / ability to recover from > S.T. Losses > -Ability to increase savings / reduce spending > -Ability to go back to work > -Income Stability > -(high/low) human capital > > Investor has (below/avg) willingness to take risk > based upon: > -statements made about risk > -Previous investment allocation > -Desire to stay away from risky assets > -unwillingess to accept a loss > (12%) in a given > year > > Overall Tolerance to risk is (avge) due to > (below/avg (willingness)) to take risk > -Suggest investor education to reconcile diff > where will > ability > -Suggest reassessment of (retirement spending > level) > -Discuss R/R objectives w/ client in order to come > to more realistic objectives > > Risk Objective is to invest portfolio assets as to > (minimize the probability) that portfolio assets > (fall more than (12%)) in any given year. > > > Time Horizon > Investor’s time horizon is (long term) and > (multi-stage) consisting of (3) stages > -Time until (major expenditure period begins) ( > consisting of X years) > -Time until retirement (20-25 yrs) > -Time until (major expense ends) > -Retirement, consisting of approx (20 yrs) > -“Additional TH may be considered if (children > attend college)” > > > Liquidity > Provide liquidity sufficient to support: > -Immediate Expenditure (if it comes out of > portfolio and income) > -Ongoing Living Expenses (of $X) (which increases > with inflation) > -One-time Expenditure (of $X, occuring in X yrs) > -3 month cash reserve for emergencies > -“There will be no major outflows from portfolio > until (retirement)” > > > Tax > -Investment Portfolio is taxed at (15%) for CG and > (25%) on Income > -Investments grow (tax deferred in 401k) > (withdrawals subject to (25% income tax)) > -“Invest in low-yielding securities to take > advantage of lower CG rate” > -Large portion of Portfolio is invested in (low > basis holding) which (must be (hedged)(sold)) > *Invest assets w/ intent of deferring or > eliminating taxes to the extent possible > > > Legal > -Consider Insider Status > -PIR for advisory, trusts, etc > -“Consult w/ legal expert regarding estate > planning” > > > Unique > -Any significant asset requested to be ignored > -Any future windfall we’re told to ignore > -Any stated restrictions on certain investments > -Large low-basis holding MAY be considered > > > > Well, didn’t intend on writing all that… just > kept going through the notes. I think that pretty > much sums up Individual IPS. Does that help > answer this question at all??
mcleod it’s much appreciated… but what if you need 10-12% to make living expenses?? none of this “living on $800K, but set aside on $3 million for symphony” or “neither your son and daughter-in law work outside the home”… i guess i can just go on no one needing 10% to live in. not really sure.
If it’s reasonable from the numbers that they give you, don’t worry about it. If it’s not reasonable, use: "-Discuss R/R objectives w/ client in order to come to more realistic objectives " Or under ability to take risk: Below avge “-Liquidity needs are high relative to Total Assets”, discuss possible reduction of living expenses / extension of retirement age / etc. Can’t roll the dice and hope bank on welfare if it doesn’t work out.
appreciated… but if you need 11% and you’re earning 3.5%, you’re close to welfare anyway. so why not try to make it and then take advantage of adjusting mechanisms that the govt has put in place (lower taxes, welfare, etc.)