Investment Strategy Research Project Seminar 3

This section analyzes in detail the future money values need to achieve each of the financial objectives that were identified in the previous chapter.

Ownership of Property First objective is for James to own his own property. There are th main decisions that need to be considered; 1. Timing of the purchase 2. Financing 3. The purchase value of the Property

Timing of the Purchase The timing of the purchase of a property would depend in the first place on the condition of the property market. Since this is considered an investment it is important to understand whether the current time would be considered a good time to buy or whether it might be better to wait some time, as market conditions might change and better deal might become available. When deciding to delay James should take into account the time value of money. Since as a result of the financial crisis the property markets have come under pressure, it is considered that this might be good time to buy as due to the shortage of buyers, good deal can be begotten.

Financing James could consider financing the property (partly) out of cash he inherited. However given the tax advantage that can be generated through mortgage payment, which are deductable from taxable income, James should consider to finance as much as possible through a mortgage loan.

Purchase Value of the Property Secondly James needs to consider the targeted value of a property he might be wanting to buy. Clearly he should not look to spend his full income on the property as he would want to have some diversification in his assets.

Trip to Florida The second objective James indicated to be making a trip to Florida. Based on information from his friend this would cost him currently £8,000. The actual cost of the trip will depend on the actual timing of the trip. Over time there will be a number of things that might impact the cost of the trip; -

Development of exchange rate between US$ and the British Pound; some of the cost will be US$ based and there for the price estimate will change on influence of exchange rate development. This risk could be mitigate by currently converting some of his assets into US$.

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Oil price development; some of the cost will be driven by the price of airplane ticket, which is normally heavily correlated to the price of oil.

Pension Plan - Early Retirement James indicated that he would be interested to retire early in order to obtain this goals the following estimated number were calculated; if James plans to retire 5 years before the receives a pension his current employer it is estimated that James needs £325,000 in accumulated funds when he reaches age 60. There is several ways he could finance this. First he could anticipate making annual payment into an investment account that he would set up for this purpose. Under the assumption that he would increase the annual payment with 4% per annum, as an inflation correction, then he could achieve this by starting now with annual payments £1,000. This will grow to the required £325,000 under an assumption of 9% annual returns. As can be seen in table 2.1 below. As investment income could vary some more optimistic as well as more pessimistic scenario’s are shown for comparison. Alternatively James could finance the £325,000 through a one time payment right now. The advantage of this would be that the full payment would earn investment income for the full period. If he would choose this route then (again assuming an annual return of 9% could be achieved) he would only need to pay £18,915 into an investment account for this purpose today.

Table 2.1 Projected Accumulated Fund (based on annual contribution) Annual contribution

Age 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60

1,000 1,040 1,082 1,125 1,170 1,217 1,265 1,316 1,369 1,423 1,480 1,539 1,601 1,665 1,732 1,801 1,873 1,948 2,026 2,107 2,191 2,279 2,370 2,465 2,563 2,666 2,772 2,883 2,999 3,119 3,243 3,373 3,508 3,648

Accumulated Fund 7% 9% 11% 1,070 2,258 3,573 5,027 6,630 8,396 10,338 12,470 14,807 17,366 20,166 23,225 26,564 30,205 34,172 38,491 43,189 48,297 53,845 59,869 66,404 73,491 81,171 89,490 98,497 108,244 118,788 130,188 142,510 155,823 170,201 185,724 202,478 220,555

1,090 2,322 3,710 5,270 7,019 8,977 11,164 13,603 16,319 19,339 22,693 26,414 30,536 35,099 40,146 45,722 51,878 58,670 66,159 74,410 83,495 93,493 104,491 116,582 129,868 144,462 160,485 178,072 197,367 218,529 241,732 267,165 295,034 325,563

1,110 2,387 3,850 5,522 7,428 9,595 12,055 14,842 17,993 21,553 25,567 30,088 35,174 40,892 47,312 54,515 62,591 71,638 81,767 93,100 105,773 119,938 135,762 153,431 173,154 195,160 219,705 247,073 277,580 311,575 349,449 391,632 438,606 490,902

220,555

325,563

490,902

Disability Insurance Disability insurance can be obtained in the Indonesian market. This will secure James of having an income if at any point in the future he will not be able to generate income for himself as he would have become disabled to work. It would be advisable for him to take out enough cover for him to continue his current life style. Therefore the annual insured income should be equal to something close to his current annual income. It would be advisable to have this amount inflation correction, which is normally an option that the insurance companies make available. In that way his income would be protected against inflationary deterioration.

Risk Profile James is still young. His primary his primary financial goals are long term goals. Therefore James will be quite willing and able to sustain variation in annual returns on his investment, this will enable James to achieve higher expected returns in his portfolio. Higher returns are normally associated with higher risk. Higher risk indicates that there are greater variances between the returns from one year to the next, although overall the return is expected to be better. Since the objective are mostly long term objective James will have enough years to make up for any negative variance in specific year(s). It would make sense for James to revisit his risk profile over time as his personal situation evolves; risk appetite should not be considered to be constant over time.