Methodical investors: conservative, gather lot of data, and remain looking for new and better

information
- Relies on hard facts
- Follow market analysts or undertake research on trading strategies
- Their discipline makes them relatively conservative investors
- Do not form emotional attachment to investment positions

Spontaneous investors:
- Constantly readjust their portfolio allocations and holdings
- Acknowledge that they are not investment experts but doubt all investment advice and
external management decisions
- Portfolio turnover ratios are highest of any personality type. Hence the portfolio
performance will be diminished by trading costs
- More concerned with missing an investment trend than with their portfolios level of risk
- They fear that failing to respond to changing market conditions will negatively impact their
portfolio

Individualist investors:
- Self-assured approach to investing
- Gain information from a variety of sources
- Devote time needed to reconcile conflicting data from their trusted sources
- Exhibit investment independence in taking a course of action
- Place a great deal of faith in hard work and insight
- Have confidence that their long-term investment objectives will be achieved

If a significant correlation exists between personality dimensions outlined in questionnaire and the
individuals ultimate portfolio selections, then the questionnaire may have predictive value and be of
practical use to advisors.

A methodical subgroup might be expected to maintain a value equity portfolio of very stable stocks,
along with a substantial commitment to highly rated fixed income securities.

INVESTMENT POLICY STATEMENT

RETURN OBJECTIVE:
Return objective have to be consistent with reasonable capital market expectations and as well as
client constraints.

Portfolios classified as
- Income oriented are biased toward a lower-risk, heavily fixed-income asset allocation
- Growth oriented are biased toward equities, with little direct consideration of risk tolerance

Classifying portfolio as Income or Growth is considered as sub-optimal to a Total Return approach.

Return can be divided into:
- Required return: necessary to meet high-priority goals
- Desired return: is to meet low-priority goals

RISK OBJECTIVE:
Risk objective is a function of i) ability to take risk, and ii) willingness to take risk

Ability to take risk: is determined objectively. The following points to be considered in while
determining the ability to take risk:
- To sustain losses without putting the clients goals in jeopardy
- How much volatility the portfolio can withstand and still meet the required expenditures
- Expenditure as percentage of portfolio
- Time horizon available to recover from poor short-term performance
- Importance of achieving goals (critical or secondary/low-priority)
- Spending flexibility (whether the spending can be safely reduced without causing much
concern, or can goal be deferred)
- Additional sources of income (like still working, other assets income)
- Liquidity needs

The importance of required expenditures and the ability to take risk are inversely related.

Willingness to take risk: is determined subjectively.

Constraints:
- Liquidity
- Time horizon
- Taxes
- Legal and regulatory environment
- Unique circumstances

Liquidity: refers to the ability to efficiently meet anticipated and unanticipated demands for
cash distributions. Two trading characteristics of the portfolio holdings determine a portfolios
liquidity
o Transaction costs: as transaction cost increase, assets become less liquid and
less appropriate as a funding source for cash flows
o Price volatility: if the market for the asset is inherently volatile, the assets
contribution to portfolio liquidity is limited. Price volatility compromises portfolio
liquidity by lowering the certainty with which cash can be realized

Significant liquidity requirements constrain the investors ability to bear risk. Liquidity
requirements can arise from:
o Ongoing expenses
o Emergency reserves
o Negative liquidity events (e.g,, giving charitable gift, anticipated home
repairs/extension, change in cash need because of retirement, and future planned
expense bring forward, and etc)
o Positive liquidity events (e.g., receiving anticipated gifts, inheritance, and etc)
o Illiquid holdings (e.g., real estate, limited partnerships, common stock with trading
restrictions, and assets burdened by pending litigation)

Factoring the primary residence into a formal retirement plan is an uncertain proposition.

Time horizon:
o Short term / medium term / long term
o Single-stage / multi-stage

Once the primary investors need and financial security are secure, the process of setting
risk and return objectives may take place in the context of multi-generational estate
planning.

Taxes:
o Tax deferral
o Loss harvesting
o Tax avoidance: tax-advantaged investment alternatives typically give lower returns,
reduced liquidity and diminished control
Tax exempt securities are attractive only when
R
tax-free
> [ R
taxable
* (1 Tax rate)]
Liquidity is reduced due to minimum holding period or withdrawals are
limited to specific purposes
o Tax reduction

Legal and regulatory environment
Two basic types of personal trust:
o Revocable trust: grantor retains control over the trusts terms and assets.
Hence any term of the trust can be revoked or amended by the grantor at any time.
Revocable trusts are often used in place of a will or in combination with a
will
Grantor remains responsible for any tax liabilities
Trust assets remain subject to any wealth transfer tax due after the demise
of grantor

o Irrevocable trust: terms of management during the grantors life and the
disposition of assets upon the grantors death are fixed and cannot be revoked or
amended
The trust is responsible for tax liabilities generated by trust assets
Trust assets are no longer considered as part of the grantors estate

Unique circumstances
Unique circumstances might include guidelines for social or special purpose investing, assets
legally restricted from sale, directed brokerage arrangements, privacy concerns, and any assets
held outside the investment portfolio and not otherwise discussed in the IPS.

ASSET ALLOCATION
Asset allocation must take in consideration
- After-tax returns
- Tax consequences of any shift from current portfolio allocations
- The impact of future rebalancing
- Asset location