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O VERVIEW

The aim of this portfolio plan is to provide the character, Donn Carlo Gamboa (DCG), a
framework in which he will obtain, spend, budget and invest money in meeting both his
short-term and long-term financial objectives throughout this life. The construction of
the portfolio involves anticipation and analysis of significant events, risk attitude, and
investment horizon. 1

Because of varying mid-term goals, the portfolio plan employs four period-specific
strategies (Accumulation I, Accumulation II, Pre-retirement, and Retirement Phase)
which are specifically tailored to goals of a specific period of time.

A SSUMPTIONS
A major assumption of the plan is that DCG will live a frugal life until at least retirement,
and hence most of the expenses grow only by inflation despite rapid increase in cash
inflows. This assumption will also affect other nonrecurring expenses such as cars and
houses.

Assumptions include interest rates, cost of expenses and amount of salary for every
month. These assumptions and their basis/sources are disclosed in the excel sheet file
accompanied by the paper. 2 For simplicity, interest rates and foreign exchange rate are
assumed to stable.

L ONG - TERM G OALS


DCG’s goal in life is to be the country’s top business tycoon in the field of real estate.
Albeit in a different career path, he tries to follow the footsteps of the renowned
Warren Buffet. That is, he will amass massive wealth by honorable means in an
accelerated phase and, after retirement, spend the rest of his life making philanthropic
efforts.

P ERIOD - SPECIFIC S TRATEGIES


An employment of period-specific strategies will be made in composing the portfolio,
following specific objectives and risks for each period. The following sub-sections will
discuss the content of the strategies and the near-term objectives of each.

1
A time table of significant list of events is disclosed on the excel file, in the tab “Events”
2
Refer to the tab “Basis” in the excel file for all pertinent information

1
A CCUMULATION P HASE I
2011-2020

DCG starts off as a financial analyst (real estate specialist) abroad to gain specialized
TARGET PORTFOLIO knowledge in the real estate sector. Working overseas also assists in accumulating the
capital to invest later for proprietary business. After four years, he further expands his
knowledge and skills by taking an MBA degree in the same country. After which, he re-
joins his family back to the Philippines and plays the role of a consultant in the family
business, which holds apartments and hotels as part of its business lines. The phase
ends when DCG finally sets up his own company.

M ID - T ERM G OALS I NVESTMEN T H ORIZON


1. To be able to accumulate enough • 39 years before retirement
capital to establish a small-sized real • 10 years before the planned
estate company at the end of 2020 establishment of business
2. To be able to finance at least half of
the wedding expenses in 2018
CASA 3. To gather valuable knowledge and
Money Market experience to jump start the
Bonds business at the end the period

Equities P ORTFOLIO C OMPOSITION AN D J USTIFICA TION


Derivatives DCG’s risk attitude, which is highly aggressive, and his investment horizon allows for
Exotics investment in very speculative instruments, such as derivatives and exotics. As a
Business financial analyst, he is also expected to have thorough knowledge in these complex
instruments.

It is assumed that the DCG’s parents will provide him subsidy in the course of
establishing the business. This serves a cushion that will result in higher tolerance for
risk in exchange for higher returns.

To attain his middle and long term goals, his target portfolio will consist of 2.5% CASA,
2.5% money market funds, 5% bonds, 50% equity, 20% derivatives and 20% Exotics. A
plus-minus 5% margin will be given to loosen up the asset allocation target. This margin
provides an amount of freedom to adjust proportions when economic climate suddenly
changes.

2
A CCUMULATION P HASE II
2021-2041

DCG starts his own company at the beginning of 2021. He will divest approximately half
TARGET PORTFOLIO his portfolio and use the proceeds as his capital. He will continue to invest the other half
in financial instruments to diversify his portfolio. As an entrepreneur, he will need to
make a lot of changes in its composition.

M ID - T ERM G OALS I NVESTMEN T H ORIZON


1. To be able turn the established • 33 years before retirement
company into a corporation at the • 20 years before the planned
end of 2041 transition of the company to a
2. To be able to provide adequate corporation
budget for the housewife and the
two children’s expenses throughout
the period

CASA P ORTFOLIO C OMPOSITION AN D J USTIFICA TION


Money Market DCG’s risk attitude has cooled off slightly from highly aggressive to moderately
aggressive in this period. The small retraction is due to the fact that DCG now has three
Bonds
dependents, his wife and his two children. However, the impact is small enough to still
Equities allow for highly speculative instruments such derivatives and exotics, albeit in lower
Derivatives amounts.
Exotics In this period, as much as 50% of his total net worth comes entirely from his business,
Business which is a realistic assumption. Other changes in assumptions in this phase, includes
doubling of leisure and other family expenses. Certain expenses also increase as the
number of dependents increase. Non-recurring expenses are also taken into account
such as hiring of maid and driver throughout the period in which the children are going
to school.

To attain his middle and long term goals, his target portfolio will consist of 2.5% CASA,
2.5% money market funds, 5% bonds, 20% equity, 10% derivatives, 10% exotics and 50%
business. A plus-minus 5% margin will be given to loosen up the asset allocation target.

3
P RE - RETIREMENT P HASE
2042-2053

After finally turning his company to a corporation, DCG becomes its CEO while
TARGET PORTFOLIO acknowledging the fact that he is nearing retirement. In anticipation of retirement, he
sets a target fund for philanthropy to be used starting 2053 onwards. While he still
desires a good return on his investments, he wants to at least have the same net worth
at the end of the period to use his money for philanthropic efforts.

M ID - T ERM G OALS I NVESTMEN T H ORIZON


1. To be able to, at least, sustain • 10 years before retirement
lifestyle after retirement
2. To be able to have gathered target
funds for philanthropy at the end of
2053

CASA
Money Market P ORTFOLIO C OMPOSITION AN D J USTIFICA TION
Bonds DCG’s risk attitude changes considerably from moderately aggressive to moderately
Equities conservative. With shorter investment horizon, he is fully aware that it will be harder to
regain capital losses due to market’s fluctuations.
Derivatives
Exotics In this period, recurring expenses dwindle down as the number of his dependents
decreases to 1 (the wife). Because there is now only the wife to support, it allows him to
Business
maintain a certain level of aggressiveness. This, however, does not justify derivatives
and exotic investments.

Better diversification is warranted for DCG’s pre-retirement portfolio. Note that for a
certain level of conservatism, there is overreliance on equity and on business for phases
1 and 2, respectively. For this reason, the business portion of the portfolio will be
chopped into a thinner slice.

To attain his retirement goals, his target portfolio will consist of 10% CASA, 20% money
market funds, 25% bonds, 10% equity, and 35% business. A plus-minus 5% margin will
be given to loosen up the asset allocation target.

4
R ETIREMENT P HASE
2054-2069

DCG begins his efforts in making the world a better place.


TARGET PORTFOLIO
M ID - T ERM G OALS I NVESTMEN T H ORIZON
1. To maximize the utility of the fund • Retired indefinitely
he accumulated for 44 years in
achieving his cause
2. To protect his wealth from
economic crashes and other risks
that may incur portfolio losses other
than the anticipated expenses

P ORTFOLIO C OMPOSITION AN D J USTIFICA TION


At this point, DCG has every reason to be highly conservative. The ideal picture is that he
spends every cent of the money he accumulated through decades of hard toil on his
CASA cause. However, there are risks that may make this goal impossible.
Money Market
There is inflation/hyperinflation risk that may suddenly depreciate the value of his
Bonds portfolio. To mitigate such risks the portfolio must be comprised of enough level of
Equities CASA and money market funds. Its liquidity will allow DCG to transfer his funds
Derivatives immediately to float-rate financial securities.

Exotics There is also business risk in which his company could suddenly go bankrupt. To
Business minimize this risk, the percentage of business investment in the portfolio must be
constricted to a certain level.

Equities must be kept to a certain low level because it is vulnerable to capital market
fluctuations. However, it is also important to include equities in the portfolio to keep the
total portfolio return above the inflation rate.

Solid diversification is the magic ingredient of this strategy. As can be seen in the chart
on the upper left corner, no one slice dominates the entire pie.

To achieve his ultimate goal, his target portfolio will consist of 10% CASA, 20% money
market funds, 25% bonds, 10% equity, and 35% business. A plus-minus 5% margin will
be given to loosen up the asset allocation target.

5
O THER S TRATEGIES E MPLOYED
The four period-specific strategies are accompanied by other strategies that hedge
certain risks.

L ADDERING
Laddering strategy involves investing in essentially the same security but in different
time horizons. Laddering the bonds intends to mitigate fluctuations in interest rates. It
also protects investors from reinvestment rate risks.

D OLLAR C OST A VERAGING


Dollar cost averaging is a strategy wherein the investor buys (or sells) financial securities
in strict intervals of time. This is compared to investing a lump sum speculatively,
wherein the transaction may occur at the worst business cycle. Dollar cost averaging is
used when DCG invests part of his income every month in a disciplined manner.
Moreover, this strategy is employed in phase transitions. From Accumulation II to Pre-
retirement Phase, for instance, the portfolio composition change is implemented in a
five year schedule.

D IVERSIFICATION
A vital part of the overall strategy is diversification, wherein the portfolio is comprised of
different asset classes and within asset classes contains varying financial products that
have low-to-negative correlations. For the equities, for example, it will be assumed that
when a percentage of the portfolio is allotted to this asset class, DCG will select a large
number of stocks that minimizes unsystematic risks. In choosing the exact stocks and in
allotting exact amount, the use of Markowitz Portfolio Theory could be used but is
already outside the scope of this paper.

6
P ORTFOLIO F LOW AND R ESULTS

NET WORTH OVER TIME


1,000,000
Millions

800,000
Total Net Worth

600,000
400,000
200,000
-
2011

2022

2033

2044

2055

2066
The graph above shows the total net worth of DCG over the years. It can be seen that
his net worth increases exponentially until retirement where it peaks and then plunges
afterwards. Note that growth of net worth began to accelerate in around 2040 in the
graph. This tallies with the fact that at the end 2040, DCG starts his own business which
is deemed as the fast-track to amassing riches.

It is also worth looking at the net worth over time graphed in logarithmic scale to better
see the pace of accumulation. This graph is provided below.

NET WORTH OVER TIME


LOGARITHMIC SCALE BASE 10
10,000,000
Millions
Total Net Worth

100,000
1,000
10
0
2011

2034

2057

7
N OTES
This paper is written in a third person perspective to sound more professional and
objective.

P E R S ONA L P OR T FOLI O P LA N

DONN CARLO D. GAMBOA


IV- BS MANAGEMENT ENGINEERING MINOR IN FINANCE
SUBMITTED TO: MR. NAVIN UTTAMCHANDANI
FIN199 – X
OCTOBER 8, 2010