In 2007, Maureen Carter, a retired 64-year-old, divorced her husband of 42 years. As part of the property settlement, the family home was sold and Maureen's share was approximately $450,000. In addition to this amount, the remainder of the property settlement amounted to an additional $550,000. Her total settlement hence amounted to $1,000,000. Since she was going through a difficult adjustment, she decided to rent a unit in Parramatta on a six-month lease but she always intended to buy a unit in the near future.
Maureen went to see a friend Jill, who was a financial planner, to get advice as to how to invest the funds to secure a comfortable retirement. She made it clear to Jill that her priorities were income and to make the money work for her. In her initial interview with Jill, Maureen indicated that she intended to buy a property in the next 12 months.
On the basis of their conversations, Jill assessed Maureen to be a growth investor and recommended the following investments.
Allocated pension (1) $350,000
Allocated pension (2) $400,000
Bank shares $80,000
Unlisted property trust $90,000
Managed Australian share fund $65,000
Bank account $15,000
In mid-2008, Maureen became concerned about the market fluctuation and the rapid deterioration in the economy. She decided it was time to buy a property to live in and approached Jill for the funds. Maureen was shocked when Jill told her that it would take weeks to make the funds available as one of the allocated pensions would now need to be commuted to a lump sum. In panic mode, Maureen purchased a unit for $380,000 in August 2008. As the global financial crisis worsened, Maureen found her income declining drastically, the unlisted property trust was frozen and the value of the shares she held plummeted in value. Maureen now found her overall remaining capital had fallen by $250,000. She now had insufficient funds to provide sufficient income for her everyday needs and was forced to apply for the Age Pension.
Review this case study, especially in relation to Maureen's risk assessment and the suitability of the investments chosen, given her situation. Discuss what risk profile should have been assigned to Maureen and, if this had occurred, how the outcome might have been different for Maureen. Justify your answer.
Tom Ponders Managed Funds
Tom would like to set up a program that enables him to supplement his superannuation fund and at the same time provide some funds for his child's education. He feels he needs some backup in order to provide for the long-term needs of his family.
Although his income is modest, Tom feels that he can probably invest about $150 a quarter (and, with luck, increase this amount over time). He currently has about $10,000 in a savings account that he would be willing to use to begin this program. In view of his investment objectives, he is not interested in taking a lot of risk. Because his knowledge of investment extends to savings accounts and a little bit about managed funds, he approaches you for some investment advice.
- What types of managed fund investments would you set for Tom? Include in your answer some discussion of the types of funds you would consider, the investment objectives you would set, and any investment services (eg, withdrawal plans) you would seek. Explain.
- Consider the ratings and rankings of blend medium share funds reviewed by Morningstar. Nominate three you would recommend to Tom.