T +44 (0)20 3475 8375

E info@zuckerinvestments.com

How Much Investment Risk?

Case Study 1: Ms N.S – How Much Investment Risk?


Initial Position:

Ms N.S was born in 1937 and suffered from dementia since 2014. In 2015, a law firm was appointed as Property and Affairs Deputy. Shortly after, she moved into a care home, and her flat was sold to pay for the cost of care.


Financial Position:

The analysis of her financial position showed assets of £835,000 from the sale of her principal residence, a savings account and a current account. She had an annual income of £28,570 from an employer pension, state pension and attendance allowance from the DWP. She had total yearly outgoings of £70,200 for care home costs, personal expenses and solicitor’s fees.


The Challenge:

The Deputy challenged us to analyse the expected worst case loss of an investment portfolio aligned to her risk profile. Furthermore, the Deputy wanted to know if the portfolio would still be able to provide the required capital to maintain the clients’ quality of life and care after having suffered such a worst case loss.


The Approach:

We first analysed N.S’s cash flow position, incorporating the effect of inflation and allowing for higher health care inflation. We drew up a table of her income, including an expected investment income and calculated the total income net of expected taxes. The next step consisted of building a table of her net income shortfall and how this would develop over the 15-year planning period.
We analysed two different portfolios, a conservative one with a 4.5% annualised target return and a balanced one assuming a return of 5.5%. We decreased the portfolios each year by the amount of the net income shortfall required to sustain her living expenses. The conservative portfolio was depleted aver 12 years whereas the balanced portfolio lasted until the 16th year.
We calculated the worst loss one could reasonably expect using 6-monthly standard deviations and concluded that this would be a 15.8% loss for the conservative portfolio and a 22.7% for a balanced portfolio. We also calculated the potential rate of return during the recovery period and the length of such a period. We applied these losses to both portfolios after year 2, 8 and 12 to analyse the impact on the portfolio’s ability to provide the required cash flow.

The Outcome:

Based on our analysis, we recommended that Ms N.S’ assets should be invested in a balanced portfolio rather than a conservative one. In our simulation, this portfolio proved to be more robust and better positioned to recapture lost ground after a major loss and provide the required cash flow required to sustain the quality of life and care for a longer period.