Hi folks, I am always wondering about the principal spending on the individual Port. Mgmt. For example, in Book 6 P73, Solution to Q4 in the example. Since Stern is single, assume he wants to enjoy his life in maximum (i.e. spending most of his wealth before he dies), then the solution would be spending his 1.2 million little by little, instead of cutting his expense? In the individual portfolio mgmt, should we always assume the priciple should be untouched unless the question specify it? Thanks.
Good question. I’ve been wondering the same thing.
I think that is correct.
I have started a thread on this a while ago, maybe check it out: http://www.analystforum.com/phorums/read.php?13,935992 Answers were somewhat unconclusive, however, it seems that touching principal is never (seldom) required in the CFAI cases.
Assumptions are: If they want to leave money to future generations, the goal is to pay expenses and grow the principle. If they do not want to leave money to future generations, the goal is to pay expenses and leave the principle untouched. The only time you’d draw down the principle is if it was specifically mentioned.
I’d bet that they set up the question that the portfolio is a “total return” portfolio and they’ll steer clear of the touching principal question. Instead you’ll want to focus on real returns, so that they can bring in the concept of inflation as it relates to future income needs and how they impact required returns. Most trusts are now drafted this way.