Yanni and Joanna need some investment advice. Joanna has sold $660,000 worth of WOW shares that she inherited late last financial year. She has $616,000 remaining after paying capital gains tax, which she has deposited in a cash management account. The couple would like you to prepare a formal investment plan to help them appropriately invest this money. During your discussion, you gather the following information:
- Yanni is 51 years old and Joanna is 52.
- They have been married for over 20 years and have two adult children, one is currently completing a Masters degree in Economics and one has a Masters degree in English Literature. Both children still live at home and the eldest child is engaged to be married. Once married, she expects to continue to live with her husband in the family home for three years while they save for their own home.
- Yanni earns a salary of $202,000 p.a. as a purchasing manager for Woolworths.
- Joanna is an administration assistant at a medical centre, earning $58,000 p.a. before bonuses.
- They have a cash flow surplus of $62,000 after tax, day-to-day expenses and debt servicing.
- They would like to accumulate wealth in the coming years to prepare for their retirement and help their children save for their first homes. They expect to give a total of $100,000 over three years ($50,000 to each child) and another $110,000 in about eight years ($55,000 to each child).
- In addition, they have a short-term goal to holiday in Europe for one month next year, costing about $50,000.
- You have already determined that Yanni and Joanna's employer superannuation balances are sufficient for their needs at this time, as they have both been investing into personal superannuation via salary sacrifice on top of their compulsory contributions. You have already confirmed that these arrangements are satisfactory.
- They live in a large and comfortable new home worth approximately $925,000. They see no need to change their living arrangements before retirement.
- They have a personal mortgage balance of $150,000 secured against their home, a $12,000 bank credit card debt and $4,000 spread across three store credit cards.
- They own an investment property worth $418,000 with an attached investment loan/mortgage of $280,000. They do not want to sell this property.
- They say that they have been investing for some years; however, they still feel overwhelmed by the number of options available and concerned about recent market volatility.
- They are worried about losing their cash and have so far avoided investing at all, apart from depositing it in the cash management trust.
- Yanni owns 10,000 Woolworths shares, 2,000 NAB shares and 1,000 BHP shares, together valued at approximately $190,000.
- They expect to make partial withdrawals from the investment portfolio that you recommend over the coming years. This will enable them to fund their lifestyle expenses, holidays and the assistance to their children mentioned above.
- Yanni and Joanna have a busy lifestyle and are actively involved in charity work and their hobbies.
- They are interested in maximising after tax returns in order to help them achieve their goals.
- They have considered selling all their shares and investing the proceeds in a term deposit, or establishing a margin lending facility and investing the money in WOW, WES and WPL shares.
You should prepare an investment plan proposal for your clients. You are required to provide:
a) A brief but comprehensive discussion of investment return, risk and diversification.
b) Suggested non-superannuation strategies with overall asset allocation table(s).
c) Suggested investment products to implement the agreed asset allocations. While you will not be assessed on your specific brand choices, you will be assessed on the appropriateness of the strategies and types of products recommended.
d) Assumptions that you make in the plan, including justification of those assumptions. Credit will be deducted where this is not provided or the assumptions change the specifications of the assignment.
e) Advantages, disadvantages, justifications and risks of the strategy and product recommendations you make.
f) Comments on the investment ideas that the clients have considered so far. These are:
i. selling all their share investments and depositing the proceeds in a term deposit, or
ii. investing the money via a margin loan in three direct equities: WOW, WES and WPL.
While you should briefly consider the merits of the individual investments in your response, emphasis should be placed on the appropriateness of these investment ideas in the context of the couple's overall portfolio.
g) A response to Joanna's statement: 'I am very worried about a possible downturn in the markets and am thinking about selling out and buying the shares back when times are better. What do you think?'