Case Study #4 Answers

1. Determine their next target portfolio size goal

Bill and Suzy added $140,000 to their initial portfolio size goal of $60,000.  Now their goal is $200,000.  They will need to readjust their target allocations consistent with this goal.

With their current salary of $80,000, their three month emergency fund value should be $20,000, which they have. 

Their allocation to bonds and cash, however, is now 25% * $200,000 or $50,000.  Since their Emergency Fund is filled, they now can purchase additional fixed income securities to fill this gap.

2. Determine asset classes and target percentages

Multiply their asset class percentages by their next target portfolio size to get their asset allocation targets. 

Emergency Fund (25% * $200,000)      $50,000

U.S.  (55% * $200,000)                          110,000

International (10% * 200,000)                  20,000

Small cap (10% * 200,000)                      20,000

Total Portfolio target                              200,000

3. Calculate the target amount for each asset class in both the taxable and retirement accounts

Take the target weight of each asset in both the taxable and retirement side multiplied by the target portfolio size to get the target asset size.  For example, Bill and Suzie decided that 4% of their small cap allocation of 10% is in the taxable accounts, with the remaining 6% in their retirement accounts.  Their dollar allocations would be:

Taxable:       4% * $200,000   =  $8,000

Retirement:  6% *   200,000   =  $12,000

4. Research additional candidates

Bob and Suzie’s Emergency Fund is completed.  But they still have allocation in the Bonds/Cash asset class of $30,000.  Using the principles discussed earlier, Bill and Suzie could then select another asset to gain exposure to their chosen asset classes

Suppose they decided to add the Charles Schwab Intermediate Term Bond Fund to their portfolio.  Their Bonds/Cash allocation would be:

Bonds/Cash allocation 25%*$200,000 = $50,000

Emergency Fund = (20/200)  = 10% or     20,000                               

Remainder of 15% or                               $30,000

5.  Purchase the new assets and compare the actual portfolio against the target portfolio

1. Since their Emergency Fund is full, they could begin purchasing the Schwab Intermediate Bond Fund

2. Purchase Core assets next

3. Then purchase Diversify assets

4. Then purchase Opportunistic assets (optional)

For Bill and Suzie, their portfolio would be:

Their final targets would be

4. Opportunistic: 

Individual Stocks and Sector Funds                                        0%    0%

3. Diversify:

SmCap, Fidelity SmCap                            4%   $8,000   6%  $12,000

International, Oakmark Int Fund:              4%   $8,000   6%  $12,000

2. Core:

LgCap, Vanguard S&P 500:                   35%  $70,000  20%  $40,000

 1.  Bonds/Cash

Emergency: ING Direct,                          10%   $20,000 

 Schwab Bond Fund                                 15%   $30,000