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Evaluate a personal investment portfolio you create from both a long-run and a short-run perspective, bearing in mind the risks like those which events like the 2007-08 financial crisis and ensuing credit crunch create.

Title: My individual investment portfolio and an evaluation of it in relation to the short and long term effects of a financial crisis such as that of 2007-08.

Your final piece of coursework for the module requires you to evaluate a personal investment portfolio you create from both a long-run and a short-run perspective, bearing in mind the risks like those which events like the 2007-08 financial crisis and ensuing credit crunch create.

Assume you have been a highly successful executive in a consumer related business, which has now been taken over by an American multinational. However the new owners have decided to replace the management team by new executives from its European headquarters and you have been offered a very generous voluntary severance payment, which after income tax leaves you with £1.5 million to invest. You need to secure your future for at least 10 years ahead using these funds, and are mindful that in that time period there is a possibility than another financial crisis could occur. In consequence you wish to ensure that at least 70% of your portfolio is in low or medium risk investments (so you would wish to avoid such things as smaller company shares and low grade corporate bonds for at least this portion of the portfolio). You will have to decide how far to use managed funds such as unit trusts or property funds in any part of your portfolio, or whether, and how far, to use investment trusts, as well as or instead of direct investment in single company shares. You are free to use a full range of investments.

In addition to this severance money, you also have the following other financial assets. Long-dated gilts with a yield of 4% based on a current market value of £65,000, and ordinary shares in the company which previously employed you paying a current dividend 5.8% on a current market value of £135,000. You also have cash ISAs with a current value of £48,000 and giving you an interest return of 1.25% per annum. You can either leave these investments untouched, or integrate them with your severance payment portfolio. So you have potential funds of up to £1.748 million to invest as you see fit.

Using what you know about financial markets and financial, create and critically evaluate for risks flowing from a serious financial crisis such as 2007-08 an appropriate portfolio for yourself.

Remember not all financial crises are the same. The recent credit crunch has been characterized by governments and central banks attempting to promote recovery through low interest rates and quantitative easing (trying to create liquidity and lending by the banking system). But this is not always the case. In the past crises have occurred at times when inflation has been high, and so have interest rates to counter price increases. Inflation can cause a foreign exchange crisis where currency depreciation creates cost-push inflation through the costs of importing goods. So you need to plan as best you can for both high and low interest rate scenarios affecting the value of your portfolio, as well as upturns and downturns in different economic sectors.

You can base your portfolio on reasonable assumptions you make about your own aims, objectives and future, providing you adhere to the following instructions:

1. Assume a minimum investment period of 10 years.

2. Your aim is to create a portfolio which produces real returns over the rate of inflation. Consider how you can do this.

3. At least 70% of your portfolio is to be invested in a diversified range of assets, which are relatively resistant to economic downturn. The remainder of the portfolio can be invested in higher risk assets according to your own risk preferences. You need to explain your attitudes and explain briefly what your long term plans are.

4. It is important you explain how your have designed your portfolio in relation to various types of economic, financial and political risk.

5. You are free to invest globally, wherever you believe an appropriate balance between risk and return exists. This does not preclude you investing solely in a single economy (say the UK) if you see this as the best option for you. Remember overseas bonds and shares may be subject to foreign exchange risks. You will need to explain why you have chosen a particular global asset allocation.

6. You should attempt to include a diversified range of financial assets and show how these assets can be expected to react to different aspects of a future economic crisis or crises.

Questions you may wish to ask yourself in relation to this exercise include the following:

• Are you an income or value investor, or a mix of the two? How much income do you need each year from your portfolio to maintain your living standards?

• How much cash do you wish to retain on deposit for emergency access, bearing in mind this will earn little or no interest but is likely to be crisis resistant?

• Do you have a goal in mind in terms of returns (e.g. 5% per annum)? How will you structure your portfolio to achieve this?

• Ultimately what do you want to do with your wealth after a 10 year period? (e. g. spend it, retire on it, invest in a business, retain your investments or bequest it?)

• Are there any specific investments you wish to consider or disregard? (e. g. ethical investments, investments in particular activities or geographic locations?)

• How far do you wish to use collective investments such as unit trust or property funds, other than direct investments in shares and bonds?

• If the value of your invested capital fell by say 30%, what would you do? (e. g. sell your holdings or wait for them to recover, or completely change your portfolio?) What are the implications of this for the short and long-term value of the portfolio?

Remember there are no clear-cut right and wrong answers to this exercise. You are attempting to undertake an exercise that professional financial planners undertake regularly as well as many investors on their own behalf. However you are attempting to demonstrate a good understanding of personal investing and financial markets, and to clearly show how investments and markets are affected by events such as the2007-08 financial crisis.

Marking scheme

25%: subject matter understanding and judgment

25%: critical analysis.

25%: evidence of wider reading.

15%: synthesis of ideas into a logical, coherent report.

10%: presentation and English.

Your report should be up to a maximum of 2,000 words


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