JIM

- Jim is a retired doctor. He was married for 25 years until his wife died about two years ago. He now lives alone. Financially, Jim is comfortable in retirement largely as a result of following a financial plan as a married couple for many years.

- Jim is active, in good health and helps out as a volunteer in several community activities.

- Jim is interested in scuba diving and likes to visit famous reefs and shipwrecks. Many of these sites are overseas. Ideally, he would like to undertake an overseas holiday each year.

- Jim is conservative by nature even more so since retiring and losing his wife. He has no interest in risky investments.

QUESTION:

Jim is considering changing the asset allocation within his investment portfolio. Currently, the portfolio is allocated to AAA government bonds (25% to Australian government bonds and 25% to German government bonds) and blue chip stocks selected from the ASX top 100 companies. The returns from the bond investments, especially the German government bonds are very low close to zero. Jim is seeking higher income opportunities and is considering selling the German government bonds and allocating the proceeds to preferred stocks selected from the ASX top 300 companies. Currently, several preferred stocks (including hybrids) are paying dividends with an equivalent return of about 6%. Discuss the issues that Jim should take into account before taking a final decision. Your response should consider the changes in the portfolio in terms of risk exposure and return exposure. Your response should also consider the revised portfolio within the context of Jims major assets and overall financial situation.

Client Name Chris Kit and Jo Jim 71 Widower (single), home owner Age 29 40 and 42 Status Single, renter of Studio Married, home owners apartment Dependents Nil Two children (age 6 and 8) Occupation Engineer Accountant and Biochemist Net Income AUD115,000 pa from salary AUD150,000 pa (Kit) and (after super AUD120,000 pa (Jo) from and after salary tax) Expenses AUD85,000 pa including AUD175,000 pa including the (living and paying rent for the Studio home loan financial) apartment Major assets Cash at bank AUD15,000 Cash at bank AUD75,000 Superannuation Superannuation AUD250,000 AUD120,000 Home AUD1.8 million Car AUD25,000 Nil Retired Doctor AUD85,000 pa total from retirement fund and investment portfolio of bonds and shares AUD55,000 pa Cash at bank AUD30,000 Superannuation AUD1.8 million Home AUD1.5 million Investment portfolio AUD250,000 Car AUD50,000 Nil Nil Major liabilities Major financial goals Purchase an apartment within five years (price approx AUDO.7 million) with 20% cash and 80% bank loan Home loan AUD1.2 million (interest only loan) Operate a conservative budget until the children complete high school in about 10 years time Continue self funded retirement and undertake one overseas holiday each year (approx cost AUD30,000 per holiday additional to normal expenses) Client Name Chris Kit and Jo Jim 71 Widower (single), home owner Age 29 40 and 42 Status Single, renter of Studio Married, home owners apartment Dependents Nil Two children (age 6 and 8) Occupation Engineer Accountant and Biochemist Net Income AUD115,000 pa from salary AUD150,000 pa (Kit) and (after super AUD120,000 pa (Jo) from and after salary tax) Expenses AUD85,000 pa including AUD175,000 pa including the (living and paying rent for the Studio home loan financial) apartment Major assets Cash at bank AUD15,000 Cash at bank AUD75,000 Superannuation Superannuation AUD250,000 AUD120,000 Home AUD1.8 million Car AUD25,000 Nil Retired Doctor AUD85,000 pa total from retirement fund and investment portfolio of bonds and shares AUD55,000 pa Cash at bank AUD30,000 Superannuation AUD1.8 million Home AUD1.5 million Investment portfolio AUD250,000 Car AUD50,000 Nil Nil Major liabilities Major financial goals Purchase an apartment within five years (price approx AUDO.7 million) with 20% cash and 80% bank loan Home loan AUD1.2 million (interest only loan) Operate a conservative budget until the children complete high school in about 10 years time Continue self funded retirement and undertake one overseas holiday each year (approx cost AUD30,000 per holiday additional to normal expenses)