The Investment Behavior of the Client Essay

Investment Analysis

This report focuses on the investment behavior of the client. There will be an analysis of his current portfolio of investments. The findings would help to make new strategies to gain more from investments and balance out the risk appetite of the client. The report will give several recommendations at the end.

Introduction about the Client

Philip, who is currently, aged 32 years and single, graduated five years ago in Electrical Engineering. He is currently living with his family which includes his father who is soon to retire in five years, his mother who is a teacher and still has seven years left before retirement, and a sister who is well-educated and seeking a job. With an Annual Income of £34,600 (after-tax), has annual expenses of approximately £31,000. With £53,600 in his bank account, has a very cautious approach to investments. He recently inherited £50,000 from a close relative. He has total credit over him of £9,930.

Client’s current Investments

Currently, the portfolio of investments of Mr. Lewis includes Gilts and a variety of shares. The holdings include Treasury bonds with a face value of £2,500 which gives 6% annual interest. The OEIC holdings that were bought 3 years ago contain 700 shares managed by JP Morgan Asset Management New Europe. The client has not kept a regular check on the stock’s performance and is unsure whether to continue with the stock. The client also purchased shares in utility companies in September 2008. He aimed to invest in stocks that are very less risky and recession resilient. His holdings include 250 shares of Drax and 150 shares of Severn Trent (Bailey & Kinerson 2005; Weiss 2009). The table below shows a summary of various investments.

The pie chart below represents the share of investments

After the death of his close relative, he inherited £50,000, which he retained it in a building society savings account. He is concerned about the low return from the savings account. The table below shows a summary of various interest incomes.

The pie chart below represents the share of income

The table below shows the net worth statement of Lewis.

Analyzing other qualitative details

1. When it comes to asset allocation, Philip portrays a passive investor. It is shown by the ratio of assets and debt or net worth. Most resources are allocated to assets hence a high net worth.
2. The total value of long-term care assets at risk amounts to £55,650.
3. The net estimated Life Insurance Needs Shortage for Philip amounts to £93,000.
4. Philip does not have a will.
5. Philip has Durable Powers of Attorney.

Client’s current behavior towards risk and what would favor him

Presently, Mr. Philip falls under the category of a low-medium risk-taker. He does not have goals for a long-term period such as more than 10 years. His current behavior will result in low income that would not be adequate to meet all his financial obligations. His investments in Gilts indicate that he is not willing to take more risk but want to ensure his money is not lying in a bank account with a low-interest rate on savings. He is a type of investor with a portfolio with a majority of bonds and cash, but with some exposure to equities (Bekkers et al. 2009).

Three foremost components determine an investor’s risk profile. His willingness plays an important role in the behavior to invest in different assets. If an investor is willing to take a higher risk, he would aim for a higher return. Similarly, an investor is like Mr. Philip who is very cautious towards taking the risk would mean that he is not willing to earn higher returns from risky assets. The next component is the ability of an investor to take risks, which refers to the current financial position of the investor. He must have money to invest and take risks to earn profits. The last main component is the need of an investor which refers to the dependent ability of the investor on the income from his investments (London South East 2012).

If we analyze Mr. Philip’s position according to the theory, he is willing to invest his money but wants to ensure that he does not incur losses which makes him a low risk-taking investor. His ability to invest in terms of financial position is stable for a large amount is kept in a bank which could be utilized for investments and also the amount of his current portfolio of assets. He does not have a very obvious need to earn money so that he may be able to meet his financial obligations at home, so he can afford to take higher risks for better returns.

Since Mr. Philip is working in a firm that pays him a fixed salary, this ensures that whatever the situation from his other investments would be, he would have something in his pocket to meet his financial obligations at home. Generally, an investor of his age is considered to be a high-risk taker, and invest in various assets to minimize the risk. The investor should have a diversified portfolio so that even if he incurs a loss in one asset, it is backed by the gain from other assets. Another component that determines the behavior of an investor is the tax concerns. No investor would want to make a profit on investments only to give a major portion to a third person that could be taxed to the government as well (Hanna et al. 2003).

Analysis and recommendations on current portfolio

Treasury Bonds

My recommendation to Mr. Philip would be to withdraw his money from the Treasury bonds that he invested at 6 percent after his graduation and invest in a more risky asset that could give better returns than he is earning presently. He can surely bear the risk involved in the stocks by diversifying his portfolio (Rust & Golombok 2009).

OEIC holdings and Fidelity China Special Situations Investment Trust

The holdings in an OEIC in which he purchased 700 shares in New Europe A Acc have given positive gains to Mr. Philip. The current performance shows a good picture of growth in 3 years. The Net Asset Value (NAV) shows the addition of 188.40p which means 1.88% and the total 3-year growth is 12.54 percent. The graph and performance chart indicates positive returns are indicated below.

The bar graph below further illustrates returns of the various investments

The pie charts below shows proportion of returns for each investment in;

Drax shares and Severn Trent shares

Mr. Philip’ investments in Drax shares also show very positive signs for the future. The news in the market suggests that “Drax would become the United Kingdom’s biggest source of producing renewable energy” (Digital look 2012). The performance of Drax’s shares over the five months is indicated below.

The current situation of the stock is negative 2.44% in share price. The stock price has continuously declined since September 2012. The interim report of the company suggests that the consumption through its calculated income base and expectations had fallen every year. The bad debt level would increase to a level of 2.2% of sales. Also, Severn Trent is expected to deliver low growth revenue which would drop to a single digit in percentage. But at the same time, a special dividend of £150 m was paid out to its shareholders in addition to the ordinary final dividend of 42.06p. My recommendation would be to hold investments from Severn Trent stocks and invest more in Drax shares. Drax shares show a very positive sign to shareholders.

Tax Efficiency

Tax efficiency shows the amount that an investor is left with after paying tax. Tax planning aims to organize the financial resources of Philip to reduce tax liability. The net effect is an increase in the disposal income of Philip. There are three ways Philip can reduce taxes these are, reducing income, increasing expenses, and making use of the tax credits. Before retirement, Philip operates within a tax bracket of 28%. After retirement, Philip will be in a tax bracket of 25%. Further, Philip lives in a region where sales tax is 8.5%. As a measure to reduce taxes, Philip can increase the length of his investment so that they mature after retirement. This will enable Philip to pay the lowest amount of tax Roszkowski et al. 2004).

The right time to switch to safer investments

For every investor, the right time to switch to safer investments such as risk-free Treasury Bills or others should be pre-planned. The plan should ensure that the client has adequate funding to meet his financial obligations after retirement. The right strategy is to invest that guarantees a certain amount of return after a certain period such as real estate and equities. Thus, the investor must reallocate the profits and increase them by putting them into safe investments for future spending.

Philip needs to invest the money in profitable investments. The current and suggested asset allocation is shown in the table below.

Pie Chart of Investment Portfolio

Summary of the Findings

Overall, the findings suggest that the cautious approach of Mr. Philip has resulted in lower profits to him. A large amount is lying in the bank account that could be invested in inequities. Mr. Philip should change his risk attitude and pursue investments that are risky and generate high returns. The current portfolio is not adequate. For instance, the amount of money in a savings account should be reinvested in other profitable ventures. Flexibility is paramount when making investment decisions. It is necessary to divide wealth into several assets until he attains a balanced portfolio (Gary et al. 2004; Swart 2002).

An appropriate recommendation would be to invest in the stocks of Drax since it promises high returns in the future. On the other hand, the Severn Trent shares need to be held right now and wait for some time until the falling prices from the past month rise again. According to the market trend, it is not necessary to switch the investments from OEIC to Fidelity China Special Situations Investment Trust. The news in the market indicates that Fidelity China Special Situations Investment Trust will not perform well shortly. The OEIC shares are performing well in the market. From the time when Mr. Philip invested in the stocks of OEIC three years ago, it has given a return of 12.54% (Bull 2007).

Apart from making optimal investment decisions, the client must come up with long-term investment plans. This should also include a plan for after retirement. The plan should outline future financial obligations. This should guide him in making current investment decisions (Kline 2003; Vandyck 2006).

Assumptions made in the analysis

Other than the information provided in the case study, some other assumptions are made in the analysis. The assumptions are summarized in the table below.

Conclusively, the financial planning process enables an individual to plan for his earnings with an aim of converting finances to wealth. The process comprises of six basic steps. These are, establishing and identifying a relationship with the client, gathering client data including goals, analyzing and evaluating the financial status of the client, coming up and presenting financial planning recommendations and alternatives, implementing the financial planning recommendations, and monitoring the implementation of the recommendations (Vance 2003; James 2003).

References

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Digital Look 2012, Equity options: Protect and enhance the share portfolio. Web.

Gary, P, Brinson, S, & Gilbert, L. 2004. Determinants of portfolio performance II: An update. Financial Analysts Journal, vol. 47 no. 7, pp. 3-11.

Hanna, S., Gutter, M., & Fan, J. 2003. A measure of risk tolerance based on economic theory. Financial Counseling and Planning, vol. 12 no. 2, pp. 53-60.

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Rust, J & Golombok, S 2009, Modern psychometric, Routledge, London.

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Vance, D 2003, Financial analysis and decision making: Tools and techniques to solve, McGraw-Hill books, New York.

Vandyck, C 2006, Financial ratio analysis: a handy guidebook, Trafford Publishing, Alabama.

Weiss, L 2009, How to understand financial analysis, Fointanebleau, Paris.