Question

Need help with this question

Paula has a current gross employment income of $80,000 and her marginal tax rate (MTR) is 31%. She has $300,000 in a non-registered account that is currently invested in CSBs. She wants to reduce her taxable investment income as much as possible and she would like to yield 6% net of tax so that she generates an annual net income of $18,000. She also wants to keep her volatility below 20% per year if possible. Recommend an investment portfolio for her that can achieve the required yield on a tax advantaged basis. Explain the tax advantages of the investments you are recommending. If using managed funds recommend at least two different funds.

Just pick a managed fund guys, its easier than picking stocks individually.

Answer 1

Recommend an investment portfolio for her that can achieve the required yield on a tax advantaged basis:

As per Question , she wants to earn Yield of 6% net of tax . Presently she is generating $ 18000 ( 6% of $300,000) . But she wants to maintain low volatility below 20% ( if possible)

To maintain low volatility investment plan , she needs Invest in Non correlation asset classes like Bonds, commodities , currencies as well as Real estate. Non correlation assets react differently to change in markets compared to Stocks – they move in inverse way . When one asset is up , other will be down so ultimately they smooth out the volatility of portfolio

Investment in managed fund ( rather Mutual Fund ) vs Stock in US Market depends on following factor :

She has to take decision whether Quantum of risk she can tolerate ( absorb) vs how much return she is expecting ( approx 6%)

Stock always riskier than Mutual Fund . Mutual fund is nothing but pool of Equity stock funds + Bond fund

In Mutual fund stock always balance between ups and down with multiple stock so overall risk can mitigate .

Active Managed funds have a manager who look into “ outperform the market”

From cost point of view – mutual fund cost is less as compared with Stock ( share price)