Comprehensive Investment Portfolio Proposal
The client's portfolio is currently allocated 83% to equities and 17% to bonds. While this allocation may seem more aggressive than necessary for the client's current needs, I believe it remains appropriate given the Federal Reserve’s current loosening cycle. Our strategy will be implemented gradually, keeping in mind certain limitations, particularly with IRA-held assets, which may limit some accessibility. This is a high-level overview of our plan and how we aim to position the portfolio to meet long-term objectives. However, we do believe this allocation could become overly aggressive should economic conditions or Federal Reserve policy shift.
Disclosure: This communication is for informational purposes only.
1. Portfolio Strategy Overview
Our investment strategy is meticulously designed to balance growth and income while effectively managing risk through diversification and strategic use of leverage. Here’s how we achieve this:
60/40 Equity/Bond Allocation: We establish a solid foundation with a balanced 60% allocation to equities and 40% to bonds, ensuring a harmonious mix of growth potential and income stability.
Creative Use of Margin Loan: Leveraging a margin loan at an interest rate of 6.5%, we invest $300,000 in real estate. This strategic use of debt enhances portfolio value without proportionally increasing risk.
Debt Management through Bond Interest: All bond interest income, amounting to $54,000 annually, is dedicated to repaying the margin loan principal. This approach ensures that debt levels are managed responsibly, reducing financial risk over time.
Enhancing Equity Returns with Covered Options: By writing covered options on equities, we aim to increase the overall yield. This strategy not only boosts returns but also provides a buffer against minor market declines.
Continuous Real Estate Acquisition: Throughout the 8-year investment term, we will acquire additional rental properties using portfolio gains. Importantly, we will never increase the margin loan, thereby maintaining a conservative leverage profile and minimizing risk. Our plan would be to buy an additional unit at the end of year 2 and the end of year 5 with the sale of some of our equities position. This reduces our market exposure and broadens out our asset allocation.
Stress Testing for Resilience: To ensure the portfolio's robustness, we conducted a stress test simulating a 25% decline in the stock market at the beginning of Year 4. This evaluation helps us understand potential impacts and reinforces our risk mitigation strategies.
Projected Account Value Over 8 Years
Assuming Equities grow at 15% annually (10% appreciation + 5% yield from dividends and covered options writing). Rental income and bond interest are reinvested as specified.
Net Cash Flow by Year
The total cash flow includes rental income, bond interest income, equity yields, and deducts margin loan interest expenses where applicable …
