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3
HYPOTHETICAL CASE STUDY
Transitioning Into A New Model Portfolio
Current Portfolio
A client currently holds a portfolio
heavily invested in equities and little
fixed income. The client has become
uncomfortable with the significant
run up in the market and wants
to reduce their risk by following a
professional model that includes
more fixed income.
Target Portfolio
After engaging with a financial
advisor, the client found that a
Moderate risk profile would be more
appropriate for their investment
portfolio, and they were advised
to follow a professionally managed
60/40 model.
Equity: 97.0%
Fixed Income: 3.0%
Equity: 60.0%
Fixed Income: 40.0%
Analysis
The risk engine found that the current portfolio's risk level was almost double that of the model, and the Forecasted Tracking Error is
very high at 9.1%.
Outcome
The client chose to go with the Very High Tax Sensitivity option given their primary goal was to bring their overall risk level down, while realizing
a reasonable tax cost. They also decided to review their tax sensitivity option a year later to determine if they'd like to move closer to the model
and evaluate the potential tax cost of doing so.
Options
Current Portfolio
Tracking Error: 9.1%
No Management
Tracking Error: 0.0%
Taxes (est.): $48,000
Very High Tax Sensitivity
Tracking Error: 2.1%
Taxes (est.): $18,700
High Tax Sensitivity
Tracking Error: 1.7%
Taxes (est.): $20,500
Moderate Tax Sensitivity
Tracking Error: 0.8%
Taxes (est.): $29,500
Tax Consequences Of Transition
Portfolio Value
Cost Basis
Capital Gains
Potential Taxes
$500,000
$270,000
$230,000
($48,000)
Tax Consequences Of Transition
Current Portfolio
Target Portfolio
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