Overview: As an investor for yourself or your clients, you have the job of developing investment objectives and a plan to achieve those objectives and then make subsequent investments in appropriate assets accordingly. This process can be collectively termed "the investment process." It is helpful to break the process down into the four core concepts that underpin any sound investment process.

First, you must understand what you are investing in. You have to know the underlying characteristics of the investment. What type of asset is it? What type of security? How is it priced? What are the expected cash flows? Who are the typical investors and what are their typical motives? If you do not understand the answers to those questions, then the initial expectations you develop about the value and risk of the asset will be fundamentally flawed. This sets you up for missteps that can lead to underperforming your investment objectives.

Second, you must be able to estimate the value of the asset. Valuation is about assessing the estimated cash flows of the asset. This is a key component of discerning absolute return potential and the differences between competing assets. It has a significant influence on the third step in the process as well.

The third step is developing a thesis about an asset's expected return and the associated risk. This is accomplished by assessing your valuation estimates against the current market price and any developing economic or market dynamics that may impact your expected valuation or its pricing. The market is constantly changing, and these expectations need to be monitored on a regular basis to ensure they continue to correspond to the objectives you are trying to achieve.

Finally, you must understand how the assets in a portfolio interact with one another. It is likely that you will not have just one investment, so any additional assets will impact the overall performance of the portfolio. You want to formulate a plan to add assets that, when combined together, will have the potential to meet your objectives. Putting all of these steps together into a consistent, thorough process will position you to better meet the investment objectives laid out at the beginning.

Prompt: This milestone involves creating a draft of the client analysis section of the final project. Use the Scenarios below, which has the client scenarios and tables needed to complete the final project.

Specifically, the following critical elements must be addressed in this milestone:

I. Client Analysis: In this section, you will analyze your clients' financial documentation and determine their risk tolerance and objectives. To effectively address the critical elements in this section, you must analyze the information for both client one and client two.

A. Analyze each client's financial documentation in order to perform the following evaluative activities. Be sure to support your analysis with relevant client information.

1. Explain the clients' risk tolerances.

2. Explain the clients' return objectives.

3. Explain the clients' liquidity objectives.

B. Using the three objectives above, write a brief investment statement classifying the clients into one of the following categories: growth, income, or capital preservation. Justify your response with specific client information.

Scenarios:

Client 1:

Ezra, aged 26, is single.  However, he is dating and is preparing to get engaged. He will need roughly $5,000 for an engagement ring almost immediately, and expects he will need $10-15,000 for the wedding in the next 12-24 months. He is currently employed and earns about $70,000 per year in salary. This salary is enough to cover all his taxes and normal living expenses of approximately $4,800. This leaves him with about $1,000 in savings each month ($350 to 401K, $650 to savings). He has been able to save roughly $15,000 to date in a 401K plan from work and about $20,000 in cash savings. His 401K plan has been invested in 100% in the stock market, including some sector specific funds. His other savings have been in interest bearing savings and cash substitutes such as money market funds. He recently received a windfall $60,000 and this prompted him to come to you for some advice. The following are few of Ezra's comments to help guide your thoughts:

1. "I understand I am young, so I need to take on as much risk as I can."
2. "I am willing to lose 30-40% on my invested capital if the return is commensurate."
3. "I do like to have a decent sized cushion in the "bank" in case something happens at my job."
4. "I don't foresee my risk tolerance changing after I get married."
5.  "Do you have any good stock tips?"

Client 2:

Jacob and Rachel, 53 and 52 respectively, are married with 4 children. Two of the children are currently in college and two in high school. They expect the other 2 children to attend college. The couple has done relatively well for themselves and earn roughly $275,000 before tax between the two of them, which equates to $190,000 after taxes. They live well below their means and this should allow them to cover all of their children's college expense out of pocket, but won't leave much for them to save over the next 6-8 years. Through savings and portfolio growth, they have managed to accumulate $900,000. To this point, they have been moderately aggressive (70 - 75% equities) with their portfolio, but feel they need to begin preparing the portfolio for partial retirement in 8 years and full retirement in 13 years.

1. "I know we still need to be somewhat aggressive, we could live until we're 90, so we need to plan for some growth even in retirement."
2. "We definitely can't afford to take a big hit in our portfolio. We don't have enough time to recover."
3. "Our jobs allow us to work part-time in retirement and we will probably do so as long as we are able."
4. "What do bond yields look like today?"
5. "I think we'll need to draw on 3-5% of our portfolio in retirement. We'd like to earn enough income from the portfolio to cover that."