Question: Susan Lussier's Inherited Portfolio: Does It Meet Her Needs?

Susan Lussier is 35 years old and employed as a tax accountant for a major oil and gas exploration company. She earns nearly $135,000 a year from her salary and from participation in the company's drilling activities. An expert on oil and gas taxation, she is not worried about job security-she is content with her income and finds it adequate to allow her to buy and do whatever she wishes. Her current philosophy is to live each day to its fullest, not concerning herself with retirement, which is too far in the future to require her current attention. A month ago, Susan's only surviving parent, her father, was killed in a sailing accident. He had retired in La Jolla, California, two years earlier and had spent most of his time sailing. Prior to retirement, he managed a children's clothing manufacturing firm in South Carolina. Upon retirement he sold his stock in the firm and invested the proceeds in a security portfolio that provided him with supplemental retirement income of over $30,000 per year. In his will, he left his entire estate to Susan. The estate was structured in such a way that in addition to a few family heirlooms, Susan received a security portfolio having a market value of nearly $350,000 and about $10,000 in cash. Susan's father's portfolio contained 10 securities: 5 bonds, 2 common stocks, and 3 mutual funds. The following table lists the securities and their key characteristics. The common stocks were issued by large, mature, well-known firms that had exhibited continuing patterns of dividend payment over the past five years. The stocks offered only moderate growth potential- probably no more than 2% to 3% appreciation per year. The mutual funds in the portfolio were income funds invested in diversified portfolios of income-oriented stocks and bonds. They provided stable streams of dividend income but offered little opportunity for capital appreciation.

The Securities Portfolio That Susan Lussier Inherited

Now that Susan owns the portfolio, she wishes to determine whether it is suitable for her situation. She realizes that the high level of income provided by the portfolio will be taxed at a rate (federal plus state) of about 40%. Because she does not currently need it, Susan plans to invest the after-tax income primarily in common stocks offering high capital gain potential. During the coming years she clearly needs to avoid generating taxable income. (Susan is already paying out a sizable portion of her income in taxes.) She feels fortunate to have received the portfolio and wants to make certain it provides her with the maximum benefits, given her financial situation. The $10,000 cash left to her will be especially useful in paying brokers' commissions associated with making portfolio adjustments.

a. Briefly assess Susan's financial situation and develop a portfolio objective for her that is consistent with her needs.

b. Evaluate the portfolio left to Susan by her father. Assess its apparent objective and evaluate how well it may be doing in fulfilling this objective. Use the total cost values to describe the asset allocation scheme reflected in the portfolio. Comment on the risk, return, and tax implications of this portfolio.

c. If Susan decided to invest in a security portfolio consistent with her needs-indicated in response to question a-describe the nature and mix, if any, of securities you would recommend she purchase. Discuss the risk, return, and tax implications of such a portfolio.

d. From the response to question b, compare the nature of the security portfolio inherited by Susan with what you believe would be an appropriate security portfolio for her, based on the response to question c.

e. What recommendations would you give Susan about the inherited portfolio? Explain the steps she should take to adjust the portfolio to her needs.