Overview of the Client’s Situation
Discuss the various types of risk profiles, associated asset allocation, and application to strategies.
Risk profile typically takes into account the overall appetite for a particular risk, investment frame, goals and financial position, and it will be prudent for both Peter and Fred to estimate correctly their risk profile depending on the prevailing situation. The assessment will help to ensure that they are not exposed to a lot of risks and hence fail to attain their potential returns. The risk questionnaires should be used to aid in ascertaining the various appetites for risk of both Peter and Fred. The methods which can be used to determine the amount of risk of various investments entails, the verifiability of the volatility of the investment.Also, the risk and returns must be compared to ascertain the amount of risk of a particular investment(Gerrans, Faff & Hartnett, 2015).
The inflation rate in the economy has to be considered by Peter and Fred before making a conclusive risk profile, and such a piece of information will enable them to ascertain the level of risk of investment and hence instead save their money than to lose. In determining the risk profiles, several factors must be taken into consideration that is the subjective and objective factors. The subjective factors include the risk assessment, use of funds, knowledge, and experience and demographic and factual factor. On the other hand, the objective factors will constitute the risk need and risk capacity. The risk capacity will entail the amount of risk which both Peter and Fred are willing to take reach their goals of going to a trip to Europe. In determining the risk profile of the two individuals, their risks tolerance must also be taken into account. The risk tolerance is typically their attitude towards the risk of investment which they are willing to take. The question should be whether they are comfortable with the investment they are going to take since the investment may result in production of dramatic swings based on their portfolio with time. The risk profile for Peter entails savings for their trip to Europe in 2025 which is estimated to be $60,000 (Gerrans et al., 2015). The other risk profile for Peter is to consolidate his superannuation accounts into one existing fund. The risk profile for Fred, on the other hand, includes savings for their European trip in 2025 and taking of an insurance cover based on their current situation.
Scope and Limitations of the Advice
Peter considers himself as a balanced portfolio allocation profile. However, such a profile entails;
According to Alviniussen & Jankensgard (2015), the portfolio will provide a benchmark allocation for the long-term investment by both Peter and Fred and this is because it is a well-diversified portfolio providing a variety of platforms. It will be expected that the balanced portfolio allocation portfolio to offer a balanced growth and income for Peter typically over medium to a long-term period (Yogo, 2016). The balanced portfolio allocation profile is best suited for Peter since he is saving for his long trip in 2025 and he will therefore be seeking for a balanced portfolio. Also, the portfolio will enable Peter to reduce the volatility and risk profile of the risk.
The critical indicative returns for the portfolio will be to provide a gross return of 5 percent to 6 percent. However such returns will be based on the performance of growth rates and interest rates. Further, there will be a certain risk which Peter will be exposed to for instance if he invests 70 percent in the growth assets, he will be exposed to the various inherent volatility of the asset class.
The application strategy for the portfolio will entail the following;
According to Lam, (2014), the key strategy is the fixed income application strategy for the portfolio will involve the maintenance of a portfolio consisting of high quality fixed income investments. The other strategy Peter can apply is cash which constitutes term and call deposits for over 100 days.
According to the case, Peter also has a risk profile of 70 percent growth assets and therefore it will be prudent for him to use the high growth portfolio allocation profile. The critical investment objective for the allocation profile is to offer long-term growth and put less focus on generating income (Yogo, 2016). The high growth portfolio allocation profile will be suitable for Peter since such an allocation profile is used for the young individuals who still have income-generating years and prefer to invest. However, the indicative returns are estimated to be 5.4% to 6.4%. Further, there are certain risks exposed to an individual who applies the portfolio profile. It is expected that Peter, for instance, will be exposed to share markets risk in the long run.
The essential application portfolio strategy will involve cash which constitutes both the term and call deposits for over 100 days. The other application strategy is the fixed income. The fixed income will be applied by maintaining a portfolio of high quality fixed income investments. However, Peter will also consider adding an allocation to the fixed income considerably about 30 percent.
References
Alviniussen, A., & Jankensgard, H. (2015). Enterprise risk budgeting: bringing risk management into the financial planning process.
Gerrans, P., Faff, R., & Hartnett, N. (2015). Individual financial risk tolerance and the global financial crisis. Accounting & Finance, 55(1), 165-185.
Lam, J. (2014). Enterprise risk management: from incentives to controls. John Wiley & Sons.
Yogo, M. (2016). Portfolio choice in retirement: Health risk and the demand for annuities, housing, and risky assets. Journal of Monetary Economics, 80, 17-34.
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