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发表于 2011-7-13 13:05
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Reading 14: Managing Individual investor portfolios
? Situational profiling
o Source of wealth: 1. Active wealth creation 2. Passive wealth creation
o Measure of Wealth
o Stage of life
? Traditional finance- 1. Risk Aversion 2. Rational Expectation 3. Asset integration
? Behavioral finance- 1. Loss aversion 2. Biased Expectation 3. Asset segregation
? Personality types- 1. Cautious 2. Methodical 3. Individualistic 4. Spontaneous
? Return Objectives (client education is risk return does not match)- Spending and growth objectives
? Risk Objective (counseling if ability and willingness does not match)
o Ability-1. Time horizon 2.Portfolio size 3. Goal importance 4. Flexibility 5. Spending needs
o Willingness-Situational profiling
? Time horizon-
o State number of stages and years.
o Look for stages defined by people other than client (inheritance).
o Bequests (multigenerational)
? Taxes
o Identify if taxable
o If uncertain include legal counseling
? Liquidity
o Only focus on liquidity that portfolio has to meet (exclude if salary is sufficient)
o Deduct any outlay within the next 6 months from investment portfolio
o Include positive liquidity events
? Legal and regulatory
o If no legal concerns mention prudent investor rule applies
o If client has desire for a trust then the manager must balance the interests of the income beneficiary and remainder men. Legal counsel for trusts encouraged.
? Monte carlo vs deterministic- Advantages-1. Probabilistic forecasts 2. Graphical 3. Better at incorporating tax effects 4. Compounding effects Disadvantages-1. As good as the inputs
Reading 15: Taxes and private wealth management in a global context
? Accrual taxes: Return and time horizon increase -> Tax drag % increases. Tax drag> Tax Rate
? Deferred taxes: Return and time horizon increases ->Tax Drag % is unchanged and value of deferral increases. Tax Drag=Tax Rate.
? Wealth taxes: Time horizon increase-> Tax drags % increases. Return increases->Tax drag % decreases. Tax drag>tax rate.
? If current taxes>future taxes then TDA>TEA
? Put equity in taxable accounts and bonds in TDA.
? Tax Alpha=Capital Loss*Tax Rate
? If high b4 tax return not possible it is better to be passive investor
Reading 16: Estate planning in a global context
? Avoid probate through rights of survivorship, living trusts, retirement plans, life insurance etc.
? Gifts-Lifetime Bequest-After death.
? Property rights-
o Community property rights- half of the estate earned during marriage
o Forced Heirship- % of total assets
o Separate property rights-
? Mortality tables use average values. Incorrect 50% of the time.
? Monte carlo simulation shows both expected value as well as probability of falling short of expected value (shortfall risk)
? Better to transfer high return assets to those that have lower tax rates
? When donor pays the gift tax the FV of the gift is increased by the sum of estate and gift tax rates and the value of the gift
? Trusts- 1. Fixed 2. Discretionary 3. Spendthrift
? Tax jurisdiction
o Source(Income) - Taxes on all income generated within border.
o Residence (Income)-Taxes on all income generated by citizens.
o Source (Wealth)- Assets located or transferred within a country
o Residence (Wealth)- Citizens and residents pay transfer tax.
? Conflicts
o Residence-Residence: Both parties claim residence over same individual
o Source-Source: Two countries could claim tax on same income (multinational company)
o Residence-Source: One country asks for source income and another asks for residence income.
? Tax avoidance is legal. Tax evasion is illegal.
Reading 17: Low basis stock
? Types of investors with low basis stocks-
o Entrepreneurs (Market, specific risks [if not diversified. Not really concerned if in control] and residual risks[counterparty, regulatory])
o Executives
o Investors- a. diversified investor b. indexing stage
? Diversification techniques
o Sale
o Exchange funds-Investors combine their low basis holding in a single portfolio.
? Public: At the end of period each partners received proportional share of the whole fund. Adv-Can borrow against the position Disadv-Inflexibility, lockup (7 years), management fee.
? Private: Same security. Actively hedge risk using derivatives and borrow to diversify. Adv- Hedged so monetizing is easy. Also original holding retained. Dis- New.
o Completion portfolios- Manager diversifies using existing funds, borrowings or portfolios cash flows. Disad- Need for large portfolio. Time Consuming.
o Hedging
o Equity collars-Must be set wide enough
o Variable pre-paid forwards-Investor must remain exposed to 15% of the value
Reading 18: Goals based investing: Integrating traditional & behavioral finance
? Lifestyle protection strategies
o Absolute
o Cash flow matching- Used if cash flows are certain. Large portfolio size required and values may deviate before maturity.
o Asset allocation approach (Monte Carlo)-
? Fixed planning horizon insured strategy- Place PV of minimum acceptable outcome in ZC bonds and remainder in risky assets.
? If reaching the minimum is critical and outside funding not available then fixed planning horizon insured strategy might be appropriate. If retaining the potential to reach maximum objective is important or additional funds can be raised then asset allocation approach might be preferred.
Reading 19: Lifetime financial advice: Human capital, asset allocation and insurance
? Social security and other employment related pensions are part of human capital. As investor ages human capital declines.
? Portion of human capital dependent on future income is known as implied assets. This falls to zero as investor retires. Retirement expenses are called implied liabilities. Implied liabilities are greatest at retirement and falls as investor ages.
? As financial capital increases less risky investments should be chosen.
? Risks
o Earnings risk- Disruption in income. Solutions are 1. Higher savings rate 2. Minimizing correlation of human and financial capital 3. Offsetting the risk of human and financial capital
o Mortality risk- Use life insurance to hedge.
o Longevity risk- Solution is lifetime payout annuity. It is of two types
? Immediate annuity- Can be structures
? Deferred payment annuity- Selects date of annuity
? Demand for life insurance
o Financial wealth and life insurance (-ve)- Already have trust funds for heirs
o Human capital volatility and life insurance (-ve relationship)- If human capital bond like then financial assets can be invested riskily. Thus demand for life insurance goes up.
o Risk aversion and demand for life insurance (+ve)-
o Probability of death and demand of life insurance (+ve)
? Longevity hedges-1. Fixed annuity- Real values fall over time/based on current interest rates/illiquid 2. Variable annuity-Volatile cash flows and may be zero even
? Financial capital risk-1. Savings risk 2. Earnings risk 3. Financial market risk
Stages of life cycle- 1. Preparation 2. Accumulation 3. Retirement |
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