Stewie Griffin is a 45-year-old lawyer, unmarried, and owns his home with no outstanding mortgage. He earns an annual after-tax salary of US$250,000. After paying for expenses, he saves about US$100,000 per year, which he contributes to an investment account in equal monthly installments. The accounts current balance is US$350,000. Upon retirement, Griffin is entitled to an employer-sponsored after-tax pension of US$40,000 per year, indexed to inflation. Griffin expects no changes in salary, savings, or living expenses for the next five years.

1

During a meeting with his PWA, Griffin outlines his financial goals for the next 15 years, at which point he plans to retire.

• Five years from now: Purchase a second home worth about US$1.1 million to be used as a vacation home. He expects to borrow 60% of the purchase price.

• Ten years after purchasing the vacation home: Sell his current home, adding the sale proceeds to his investment account to help fund retirement needs. Move into the vacation home.

  A. Identify one factor that decreases Griffins ability to take risk, and another factor that increases Griffins ability to take risk. [4 MARKS]

  Five years later, Griffin purchased his vacation home for US$1.1 million using some cash from his investment account and taking a mortgage. Following the purchase, his investment account is valued at US$700,000. His income is unchanged and sufficient to cover monthly mortgage payments, but he can now contribute only US$72,000 to his investment account in equal monthly installments. Griffin plans to work for another 10 years, then retire and move into his vacation home. At this point, Griffins PWA revisits prior assessments of his risk tolerance.

B. Identify one factor that decreases Griffins ability to take risk compared to five years ago, and another factor that increases Griffins ability to take risk compared to five years ago. [4 MARKS]

Griffin believes he is a sophisticated investor and has the ability to select the best funds and outperform market indices. He invests solely with New England Mutual Funds, a very large and well-known family of funds covering the international market. At one point, Griffin was approached by an asset manager from Pawtucket Investments, a much smaller firm by AUM compared to New England and focuses only on select market segments. The asset manager tried unsuccessfully, to persuade Griffin to switch to Pawtucket. When asked why, Griffin responded that New England is familiar and convenient.

C. Discuss two potential behavioral biases Griffin exhibits and justify your response. [4 MARKS]