Free Essay

Investing in Shares for a Household

In: Business and Management

Submitted By Ibrahims
Words 3760
Pages 16
Table of Contents

Introduction 3
1. Situation and Risk Profile Analysis 3
1.1 Background 3
1.2 Character 3
1.3 Life style 4
1.4 Time horizon 4
1.5 Objective 4
2. Asset Allocation rationale 5
2.1 Bonds 5
2.2 Equities 5
2.3 Cash 6
2.4 Assets allocation Chart 6
3. Choice of investment Vehicles 6
3.1 ETFs 6
4. Portfolio description 6
4.1 SPDR Dow Jones Industrial Average Trust (Core). 7
4.2 Vanguard Total World Stok ETF (Core) 9
4.3 Vanguard Industrial ETF (Satellite) 10
4.4 Vanguard Energy ETF (Satellite) 11
4.5 iShares iBoxx $ High Yield Corporate bond Fund (Core) 12
Conclusion 13


Making more money or at least preserving one’s wealth are the main reasons for investing. Investing on financial Markets is an option among others with its own set of rules, advantages and setbacks.
In order to to be able to pay school expenses for their three children, Mr. and Ms Brown have decided to invest some money in the stock market.
The purpose of this essay is to demonstrate how Mr. and Ms. Brown proceeded to build their investment portfolio.
In the first part of the essay we will analyze their situation to understand their risk profile, time horizon and objective. In the second part, we will expand on the asset allocation rationale to finally decide in the third part which investment vehicle is appropriate.
1. Situation and Risk Profile Analysis

1.1 Background

Mr. Brown is a forty year old man, happily married with three children; two boys (Isaac and Yassine) and a girl (Rama). The girl is thirteen, Isaac is twelve and the youngest boy Yassine is eight.
Mr. Brown is a middle manager in an international organization with a yearly net salary of USD 120,000. His wife is an executive in a local company where she earns about USD 48,000 yearly. Mr. Brown was comfortable with his salary until he got married to a woman who was already familiar with the stock markets. She convinced him to invest because the children will need more money for their university studies in the US. The girl will be the first to go in five years from now and Isaac will follow two years later. Yassine is expected to pass his university entry exam four years after his senior brother.
1.2 Character

Mr. Brown is a well-educated man with only academic knowledge of the financial market. So is his wife. Both have different stances regarding investment. The wife likes investing in shares because possessing shares she says, is owning part of a company and getting dividend in addition to the possibilities of increase in share values. She is confident and believes that buying the best shares will bring in dividends and incomes if sold at the right price.
Mr. Brown on the other hand is very prudent and believes shares are unpredictable and should be approached with the outmost care. For him the best investment is in Bonds because one is guaranteed to get one’s money back at maturity plus the interests of the bonds.
1.3 Life style

Mr. and Ms. Brown live in a developing country with their three children. They live in a rich suburb where middle and high income class people live. Ms. Brown likes to drive luxury cars and attends high class events. Mr. Brown is a rather solitary person who likes comfortable houses and movies. The couple is currently renting a house in the rich suburb of the capital. The couple just got a loan from a local bank to purchase a villa in the same suburb. There is a mortgage on the house and they will be paying about two hundred thousand dollars over the next ten years.
1.4 Time horizon

The couple believes they will have to support each child for at least five years. This includes scholarship, accommodation and pocket money. Based on the information at hand, this operation will cost USD 60,000 per year per child.
Year Rama Isaac Yassine Total expenses
0 0 0 0 0
2020 60,000 0 0 60,000
2021 60,000 60,000 0 120,000
2022 60,000 60,000 0 120,000
2023 60,000 60,000 0 120,000
2024 60,000 60,000 60,000 180,000
2025 0 60,000 60,000 120,000
2026 0 0 60,000 60,000
2027 0 0 60,000 60,000
2028 0 0 60,000 60,000 300,000 300,000 300,000 900,000

The couple has decided to invest USD 200,000 as of January 2015 in bonds and equities through ETFS or investment funds with a time horizon of Fourteen (14) years. The choice to invest in funds or ETFS is driven by the fact that it is far more complicated for an individual to buy and sell stocks and bonds on the market. Through a single ETF or funds they can access a wider range of equity or bonds.
1.5 Objective

The objective is to capitalize at least 900,000 over the next 14 years in order to cover part the projected expenses while keeping their standard of living. They are ready to add more money to the initial investment when and if necessary.
Mr. and Ms Brown are expecting an average yearly net return on investment of 10%. So they came up with the following investment plan: This approach does not factor in inflation and losses as the 10% is an average.
In order to achieve the planned objective with their diverging approach to investment, the couple agreed that they need to invest with reduced cost of investment and high return on investment. Ms. Brown does not want her funds to be managed by a third party. Mr Brown believes they need the advice of an experienced and successful fund manager. The return they want to make on their investment is high and the couple understands that this means high risk too. The portion they have decided to invest will not bankrupt them should they lose it all.
2. Asset Allocation rationale

The couple’s overall risk tolerance is high and they are ready to accept capital fluctuations over the period. The couple agreed to go for an ‘aggressive profile” (BCGE, 2009). The couple’s bank is in the US so they decided to invest in USD to minimize currency fluctuation losses.
2.1 Bonds

Bonds are considered to be a safe investment and offer the guaranty to recover the initial investment at maturity. On the other hand, bonds in the US and European markets have very low interest rates and can only be used as a kind of saving that may eventually balance losses in the stocks values. The Browns decided to allocate 15% (USD 30,000) to bonds. They are mainly aiming for corporate bonds that offer higher rates.
2.2 Equities

As Ms Brown believes in equities high return, she convinced Mr Brown to allocate 85% (USD 170,000) of the funds to equities. She argues that there may be fluctuation in the equities values, but overtime they may offset possible losses in stocks values. She also submits that the stocks offer dividends that are not negligible.
2.3 Cash

The couple decided to invest all the money in either equities or bonds. They will not keep any cash.
2.4 Assets allocation Chart

3. Choice of investment Vehicles

Ms. Brown is not willing to step aside and let some “expert” decide what stocks to invest in. She wants to be able to buy and sell herself as she used to do it with her stocks. Mr. Brown on the other hand knows how impulsive he is and does not want to be directly involved in managing the funds. After discussion they decided to invest in ETFs. “They would buy the market” through ETFs and leave it up to Ms. Brown to choose which ETF and when to buy or sell.
3.1 ETFs

The ETFs chosen are mainly tracking equities with an ETF for bonds to allow Ms. Brown to invest when she spots an opportunity for bonds ETS. They decided to invest 10 % of the allocated funds for bonds in ETF.
As advised by Dr. David Costa (2011, p. 48) the criteria to consider while choosing an ETF are: “availability, size, Provider, fees and the index to which the ETF is linked”.
4. Portfolio description

ISIN ETF NAV 12-MO YTD Morningstar Rating FUNDS ALLO.
DIA:US SPDR Dow Jones Industrial Average 180.96 2.02%
VT:US Vanguard Total World Stock ETF 62.79 2.34%
VIS:US Vanguard Industrial ETF 49.58 5.46%
VDE:US Vanguard Energy ETF 108.56 1.98
HYG:US iShares iBoxx $ high yield corporate bond Fund 90.07 5.46%

The Brown have chosen two core stocks and two satellites stocks with a satellites bonds to build their portfolio. The choice of each ETF is based on the term sheet information and information gathered from Morningstar website.
4.1 SPDR Dow Jones Industrial Average Trust (Core).

Bloomberg Code: DIA: US
ISIN: US78467X1090
Exchange: NYSE Arca
Index: Dow Jones Industrial Average
TER: 0.17%
Total Asset: 12.88 billions
Shares Outstanding: 70,840,000
This ETFS is used as a core holding because it tracks and important group of US market leaders companies (See table 1) through the Dow jones industrial index and does not bear the risk of currency fluctuations impact. It is relatively low cost.
From Morningstar’s analysis (2015):
The fund is a little less volatile than the S&P 500 thanks to the quality stocks it is comprised of;
“Since its inception, the fund has experienced minimal index tracking errors.
There are some possibilities of inaccuracy in the price weighting and the high concentration of the fund portfolio could constitute a risk inherent to any non-diversified investment.
The brown decided that the pros overweight the cons and they are ready to take the risk.

Table 1: Top Holdings Weight % Last Price Day Chg % 52-Week Range

Goldman Sachs Group Inc
7.10 193.13 USD 1.66 151.65 - 198.06 3M Co
6.12 166.49 USD 0.50 130.60 - 170.50 International Business Machines Corp
5.98 162.88 USD 1.92 149.52 - 199.21 Boeing Co
5.68 154.50 USD 0.25 116.32 - 158.83 Apple Inc
4.63 125.90 USD -1.25 73.05 - 133.60 % Assets in Top 5 Holdings 29.50

Table 2: Top Sectors DIA More Fund 3 Yr High 3 Yr Low Cat Avg Fund 0

Industrials 20.23 20.23 18.96 —
Financial Services 18.90 25.85 18.90 —
Consumer Cyclical 15.49 15.49 12.96 —
Technology 14.44 14.44 9.76 —
Healthcare 11.70 11.70 9.59 —
Portfolio Date: 03/23/2015
Data Source: Morningstar
4.2 Vanguard Total World Stok ETF (Core)

Bloomberg Code: VT: US
ISIN: US9220427424
Exchange: NYSE Arca
Index: FTSE Global All Cap
TER: 0.17%
Total Asset: 4.18 billion USD
Share Outstanding: 66,490,000
Vanguard Total World Stock ETF tracks the performance of the FTSE Global All Cap Index which in turn tracks “ well established and still-developing markets” (Vanguard, 2015).
According to Morningstar (2015), Vanguard total World Stock ETF covers about 98% of “the world’s investable market capitalization and is suitable for a core holding.’
47.11% of the ETF’s portfolio is invested in the U.S and the rest is made of foreign stocks 80% of which is dedicated to international developed stocks and 20% to emerging stocks.
This ETF is ideal for long term investments as the share values may fluctuate more often. This fund is high risk, high return and low cost. The fund is exposed to currency risks, emerging markets related risks, market regulation risks etc.
The fifteen years horizon the Brown set makes this ETF appropriate as core holding in their portfolio.
Table 3: Top holdings: VT Weight % Last Price Day Chg % 52-Week Range

Apple Inc
1.70 127.42 USD 0.83 73.05 - 133.60 Exxon Mobil Corporation
0.85 85.47 USD 1.09 82.68 - 104.76 Microsoft Corp
0.73 43.04 USD 0.65 38.51 - 50.04 Wells Fargo & Co
0.64 55.89 USD -0.25 46.44 - 56.29 Johnson & Johnson
0.64 103.25 USD 0.82 93.88 - 109.49 % Assets in Top 5 Holdings 4.56

Table 4: Top sectors: VT Fund 3 Yr High 3 Yr Low Cat Avg Fund 0

Financial Services 17.50 18.82 17.50 15.71
Technology 13.49 13.49 11.97 14.51
Healthcare 11.80 11.80 9.66 13.25
Consumer Cyclical 11.69 11.69 11.37 13.15
Industrials 11.67 11.67 11.55 11.75
Portfolio Date: 02/28/2015
Data source: Morningstar

4.3 Vanguard Industrial ETF (Satellite)

Bloomberg Code: VIS: US
ISIN: US92204a6038
Exchange: NYSE Arca
Index: MSCI US Investable Market Industrials 25/50
TER: 0.12%
Total Asset: 2.07 Billion USD
Share Outstanding: 19,040,000
Vanguard industrial ETF is a passively managed fund that seeks to tracks the performance of a benchmark index. It replicates the performance of the MSCI US Investable Industrials by investing in almost all the assets of the index. Each stock is held proportionally to its weight in the index. This ETFS invests 99% of its funds in North American industrial companies. It is one of the lowest cost with good returns. With the recovery of the US economy, US industries can expect a significant boost in the coming years.

Table 5: Top Holdings: VIS Weight % Last Price Day Chg % 52-Week Range

General Electric Co
10.13 25.36 USD -0.43 23.41 - 27.53 Union Pacific Corp
4.15 112.63 USD -0.13 90.36 - 124.52 United Technologies Corp
4.10 119.01 USD 0.29 97.30 - 124.45 3M Co
3.99 166.75 USD 0.33 130.60 - 170.50 Boeing Co
3.97 151.66 USD -0.79 116.32 - 158.83 % Assets in Top 5 Holdings 26.34

Table 6: Top Sectors: VIS Fund 3 Yr High 3 Yr Low Cat Avg Fund 0
Industrials 95.46 95.84 95.46 97.85
Consumer Cyclical 1.78 1.78 1.59 0.54
Technology 1.31 1.31 1.21 0.72
Basic Materials 1.28 1.28 1.26 0.57
Energy 0.14 0.17 0.00 0.08

Portfolio Date: 02/28/20 Data source: Morningstar

4.4 Vanguard Energy ETF (Satellite)

Bloomberg Code: VDE: US
ISIN: US92204A3068
Exchange: NYSE ARCA
Index: MSCI US Investable Market Energy 25/50 Index
TER: 0.14%
Total Asset: 3.8 Billion USD
Share Outstanding: 35,130,000
This cheap ETF offers an opportunity to explore wide range of the US energy sector. It covers at an almost equal portions narrow a wide moat stocks. The oil industry is facing possible turmoil link to high regulations, civil wars and the rise of alternative energies but this may not be of significant impact in 15 years from now. The specificity of the energy market makes VDE one of the most volatile ETF. This ETFS is a sustainable satellite holdings option.
Table 7: Top Holdings: VDE Weight % Last Price Day Chg % 52-Week Range

Exxon Mobil Corporation
21.71 84.73 USD -0.76 82.68 - 104.76 Chevron Corp
11.68 104.59 USD -1.26 98.88 - 135.10 Schlumberger NV
6.27 82.17 USD 0.20 75.60 - 118.76 ConocoPhillips
4.65 62.66 USD -0.93 60.57 - 87.09 Kinder Morgan, Inc.
4.28 41.55 USD -1.42 31.18 - 43.18 % Assets in Top 5 Holdings 48.59

Table 8: Top Sectors: VDE Fund 3 Yr High 3 Yr Low Cat Avg Fund 0
Energy 99.61 99.61 98.71 92.76
Basic Materials 0.34 0.95 0.34 1.69
Technology 0.02 0.10 0.02 0.23
Industrials 0.02 0.23 0.02 1.23
Consumer Cyclical 0.00 0.00 0.00 0.27

Portfolio Date: 02/28/2015 Data source: Morningstar

4.5 iShares iBoxx $ High Yield Corporate bond Fund (Core)

Bloomberg Code: HYG: US
ISIN: US4642885135
Exchange: NYSE ARCA
Index: iBoxx $ Liquid High Yield Index
TER: 0.50%
Total Asset: 16.16 Billion USD
Share Outstanding: 179,200,000
HYG is the only one in the Brown’s portfolio dedicated to tracking Bonds market as a small core holding. It holds a broad range of high yield US corporate bonds. This comes with a high risk of companies defaulting but the wide spread of the companies make the chances of total default lower than the average bonds ETF.
The risk-reward ratio of this ETF is encouraging.
Table 9: Top Holdings: HYG Weight % Maturity Date Amount Value

Sprint 7.875% 0.51 09/15/2023 78.85 Mil 80.33 Mil Numericable Grp Sa 144A 6% 0.41 05/15/2022 64.55 Mil 64.55 Mil Sprint Nextel 144A 9% 0.40 11/15/2018 54.92 Mil 63.14 Mil First Data 12.625% 0.40 01/15/2021 52.73 Mil 62.75 Mil Chrysler Grp Llc / Cg Co-Iss 8% 0.38 06/15/2019 56.80 Mil 59.71 Mil % Assets in Top 5 Holdings 2.10

Table 10: Top Holdings: HYG

Fund Benchmark Cat Avg Fund 0
Corporate Bond 95.77 — 83.84
Convertible 1.21 — 0.53
Commercial MBS 0.62 — 0.50
Asset-Backed 0.06 — 0.60
Bank Loan 0.00 — 3.68

Portfolio Date: 03/23/2015 Data source: Morningstar

After carefully reviewing their risk profile, objective and time horizon, Mr. and Ms. Brown have decided to opt for an aggressive method of investment. They also decided to invest in ETFs rather than index funds to allow them to have a grip on their investment and be strongly accountable for the result. Furthermore, the couple chose to invest in US based ETFs because their bank is in the U.S.
Investing in U.S based ETF did not mean investing only in US stocks; indeed the couple made sure to choose ETFs with broad exposure to US and foreign markets. They heavily relied on Morningstar’s analysis but also compared those analysis to independent sources.
They chose to invest USD 200,000 initially with the possibility of adding more money if and when necessary. They also tried to be realistic by setting an expected return rate of 10%.
All in all Mr. and Ms. Brown believe to have built a consistent portfolio to the best of their abilities and expect a high return as they chose to take a high risk.

BCGE. (2013) 'A Conceptual Choice: at the core of afficient and disciplined asset management'. BCGE Group Investment Philosophy 5th edn. Geneva. BCGE Group. [Online] Available at: (Accessed: 19 March 2015)
Bennyholf, D. G. (2008) ' The Choice Between ETFs and Conventionnal Index Fund Shares'. [Online] Available at: (Accessed: 21 March 2015)

BlackRock. (2015). iShares. [Online] Available at:
Bryan, A. (2015). 'A high-quality portfolio based on an index with a rich tradition'. Morningstar. [Online] Available at:®ion=USA&culture=en-US. (Accessed: 18 March 2015)
Costa, D. (2011). The Portable Private Banker (First edition ed.). Zurich, Suzerland: Robert Kennedy College.
Costa, D. ETF.FM Exchange Traded Funds. [Online] Available at: (Accesssed 15 March 2015)
FirstBridge. (2015). [Online] Available at: (Accessed:19 March 2015)
Franklin Templeton Investments. (2015). Vision 2020: Global-The New core . March, San Mateo, CA, USA. [Online] Available at: (Accessed: 15 March 2015)
Gabriel, J. (2014). 'This diversified junk-bond ETF offers higher yields in exchange for increased credit risk'.Morningstar. [Online] available at:®ion=USA&culture=en-US (Accessed 12 March 2015)
Gabriel, J. (2014). 'This ETF offers a cheap and broadly diversified way to invest in the volatile energy sector'. Morninstar. [Online] Available at:®ion=USA&culture=en-US. (Accessed: 16 March 2015)
Goldsborough, R. (2015). 'This ETF is a very inexpensive way for investors to gain broad exposure to the industrials sector'. Mornistar. [Online] Available at:®ion=USA&culture=en-US. (Accessed 18 March 2015)
Morningstar (2015).Morninstar. [Online] Available at:
Patricia Oey. (2015). 'A portfolio of global equities for 0.18%' Morningstar. [Online] Available at:®ion=USA&culture=en-US. (Accessed 18 March 2015)
Sharpe, W. F. (2002)' Index Ivesting: A Prosaic Way to Beat the Average Investor'. Spring President's Forum, Monterey Institute of International Studies, 1st May. Stanford University. [Online] Available at: (Accessed: 20 March 2015)
State street Corporation. (2015). SPDR. [Online] Available at: (Accessed: 21 Mach 2015)
The Vanguard Group, Inc. (2015). Vanguard Industrials ETF (VIS). [Online] Available at: (Accessed: 20 March 2015)
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