Introduction to Investment Portfolio and Management.docx

**LESSON 1: INTRODUCTION TO INVESTMENT AND MANAGEMENT PORTFOLIO** +-----------------------------------+-----------------------------------+ | - Investment and Portfolio | - Individual Life Cycle | | Management | | |...

**LESSON 1: INTRODUCTION TO INVESTMENT AND MANAGEMENT PORTFOLIO** +-----------------------------------+-----------------------------------+ | - Investment and Portfolio | - Individual Life Cycle | | Management | | | | - Investment Process | | - Venture Capital | | +-----------------------------------+-----------------------------------+ **BIBLICAL PRINCIPLE ON MONEY** +-----------------------------------+-----------------------------------+ | ***Proverbs 6:6-8, Tree of Life | ***Proverbs 6:6-8*** | | Version-TLV*** | | | | Go to the ant, O sluggard; | | Go to the ant, you slacker- | consider her ways, and be wise. | | consider its ways and be wise! | | | | Without having any chief, | | It has no commander, no overseer | officer, or ruler, she prepares | | or ruler. Yet it prepares its | her bread in summer and gathers | | provisions in summer and gathers | her food in harvest. | | its food at harvest. | | +===================================+===================================+ | ***Matthew 6:24*** | | | | | | No one can serve two masters; for | | | either he will hate the one or | | | love the other, or he will be | | | devoted to one and despise the | | | other. You cannot serve God and | | | wealth. | | +-----------------------------------+-----------------------------------+ **INTRODUCTION** - An **investment** is a monetary asset purchased with the idea that the asset will provide income in the future or will later be sold at a higher price for a profit. - One of the **main objectives in portfolio management** is to recognize the meaning and sources of risk in order to maximize the rate of return. - **Investments** can be in a different form: mutual funds, treasury bills, stocks, real estate and more. - **Investment** can either be guaranteed or linked to market performance as an example is investing in equity and debt markets. - **Equity market** can have a greater return but has a higher risk while debt markets guarantee low risk and stable returns. An investor has to consider the risk involve and the time when the money is needed **DEFINITION OF INVESTMENT: ECONOMICS AND FINANCE** - In **economics**, investment is the purchase of goods that are not consumed today but are used in the future to create wealth. People invest to beat inflation and to increase your financial worth. - In **finance**, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or will later be sold at a higher price for a profit. - **Human capital** is also included in this concept as they employ their skills to increase inventory. **Economic Investment** - The concepts of economic investments mean the capital stock of the society which are the capital goods used in the production of other goods. - It is the formation of new and productive capital such as plants, machines and equipment that can be utilized to increased production. **Financial Investment** - **Financial investments** refer to the allocation of monetary resources to different kind of assets that are expected to yield additional gain over a given period of time. - It involves a written contract such as **shares and debentures.** - People invest their funds in shares, debentures, fixed deposits, government bonds, life insurance policies, provident fund etc. in their view that investment will commit future income in the form of interest, dividends, rent, premium, pension benefits and appreciation of the value of their principal capital **DIFFERENT TYPES OF INVESTMENT** 1. **Autonomous Investment** - It does not change with the changes in income level also called as Government Investment. - It means that even if the income is low, investment remains the same. - The Government normally invest on houses, roads, public buildings and other infrastructure. 2. **Induced Investment** - Investment changes with the changes in income level, at high level of income, entrepreneurs tend to invest more as consumption expenditures increases in relation to income or vice-versa. 3. **Financial Investment** - Buying of financial instruments such as bonds, new shares, securities etc., however money invested in old shares, old bonds cannot be considered as financial investment but a mere transfer of financial asset from one individual to another. - Financial investment has a positive impact on employment, production and economic growth. 4. **Real Investment** - Investment in the purchase of new plant, equipment, construction of public utilities, factory building that will increase employment, production and economic growth. 5. **Planned Investment** - Investment made with a plan and specific objectives in several sectors of the economy. It can be also called as **intended investment** as investors prepares a concrete plan. Investors spends on the purchases of machinery, equipment and buildings. 6. **Unplanned Investment** - Investment without planning, the investor did not make a concrete planning in making an investment decision. Investment that involves changes in inventories that business did not expect, either fewer or more goods are sold than anticipated. 7. **Gross Investment** - It is the total amount invested for the purchase of capital assets such as plant, machinery and equipment. 8. **Net Investment** - Gross Investment less (minus) Capital Consumption (Depreciation) during a period of time usually one year. **BENEFITS OF INVESTING** 1. **Grow your money to beat Inflation** Investing on bonds, stocks, certificate of deposits offer returns that allows your money to create wealth over time. **Inflation** is the general increase in prices that occurs every year resulting to the decline of the purchasing power of your money. - **Corporate investor** chooses to invest in another company using their cash reserve to purchase available shares that shows an appreciation in the value of its stocks. - An **investor** must have knowledge in investing, understand that risk is involve, investigate the profile of the broker and the firm, review account policies, make some research and give complete and accurate information. 2. **It has the potential for long-term investment** Volatility in the price of stocks can be an opportunity to buy attractive shares at a cheaper price and get a better return in the long term. 3. **Provide regular income** This can be utilize in preparation to retirement when a person is looking for a regular income higher than inflation rate to cover day-to day living expenses. 4. **Tailor to fit financial Goals** Financial goals and priorities can be changing as a person gets older. Planning can tailor your investment goals. 5. **It suits your financial needs over time** Circumstance on financial needs can be change over time. As person grows older, the capacity to work and be productive declines. **Examples of Business Financial Goals** +-----------------------------------+-----------------------------------+ | 1. Increase revenue by 10% | 5. Increase market share by 5% | | | | | 2. Achieve a net profit margin | 6. Achieve a return on | | of 15% | investment (ROI) of 20% | | | | | 3. Reduce operating expenses by | 7. Reduce debt by 10% | | 5% | | | | | | 4. Improve cash flow management | | | and maintain a positive cash | | | flow | | +-----------------------------------+-----------------------------------+ **INVESTMENT OBJECTIVES** 1. **Short term high priority objective**: investors have a high priority over achieving certain objective in a short time. Ex. A young couple will give a priority to buy a house. 2. **Long term --high priority**- Investors look forward and invest to long term needs. Ex. Investing for post-retirement or education of a child. 3. **Low Priority objective** It has a low priority in investing. Ex. Provision for travel or appliances 4. **Money Making objective** -- Investors put surplus money to investment as a multiplier of their wealth. It provides capital appreciation and can be a passive income. **PHILIPPINE INFLATION RATE** **Philippines: Inflation rate from 1987 to 2029 (compared to previous year)** ------------------------------------------------------------------------------- --------------------------------------------- **Characteristic** **Inflation rate compare to previous year** **2024** **3.58%** **2023** **5.98%** **2022** **5.82%** **2021** **3.93%**  **THE POWER OF COMPOUNDING INTEREST: SAVING FOR RETIREMENT** As a person working, one should save for retirement by putting money into portfolio of investment such as stocks, bonds, mutual funds, real estate, businesses or precious metals. The risk tolerance of a younger is higher giving a chance for a greater increase in wealth. **The power of compounding interest** - You invest \$100. In one year your \$100 earns \$10 interest, now you have \$110. - The next year your \$110 earns \$11 interest, you now have \$121 without ever putting any extra money in your account. - The next year your \$121 earns \$12 in interest. You now have total \$133. - This cycle keeps repeating itself as long as your investment do well. - **= \[P (1 + *i*)^n^\] -- P** - **= P \[(1 + *i*)^n ^-- 1\]** **Other Benefits of Portfolio Investment** +-----------------------------------+-----------------------------------+ | 1. Save for retirement | 4. Start and expand business | | | | | 2. Earn higher returns | 5. Support Others | | | | | 3. Reach Financial goals | 6. Be part of a new venture | +-----------------------------------+-----------------------------------+ **INVESTMENT PORTFOLIO** **Investment Portfolio** - is the collection of variety of investment like stocks, bonds and money market instruments, cash and cash equivalents. Portfolio can help an investor diversify assets and spread risk across bonds, stocks and other types of investment. **Types of Investment Options:** 1. **Equity** - Stock investment represent equity ownership in a publicly traded company. Company issues stock as part of capital raising to fund companies' operation. Stocks may also offer dividends adding an income payout component to the investment. 2. **Fixed Income Instruments** - Bonds pay investors interest in the form of coupon payments and offer full principal payments at maturity. It is a well-known debt instrument offered by government or corporations to raise funds. 3. **Preferred Shares** - These are shares of a company's stock with dividends that are paid out to shareholders before common stock dividends are issued. If the company enters bankruptcy, the shareholder with preferred stock share entitled to paid from the company assets first. 4. **Mutual Funds** - These are the pooling of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. 5. **Derivatives** - Investment products that are offered based on the movement of a specified underlying asset. The derivative itself is a contract between two or more parties, and the derivative derives its price from fluctuations in the underlying asset. **FINANCIAL SECURITY** **Financial Security** - is a negotiable instrument that represent the financial value of stocks, bonds or other financial instrument with an action to buy, sell or trade on the market. **How to achieve Financial Security in Personal Finance** +-----------------------------------+-----------------------------------+ | - Live within your limits by | - Don't forget to invest in | | being frugal | yourself | | | | | - Allocation of budget both for | - Refrain with repayments | | short and long term | | | | - Maintain an emergency funds | | - Unnecessary debt must be | | | avoided | | | | | | - Spare consistent amount for | | | savings | | +-----------------------------------+-----------------------------------+ **ASSET ALLOCATION DECISION** **Asset Allocation** is the process of deciding how to distribute an investor's wealth among different countries and different asset classes of investment purposes. Investing funds and managing portfolios should focus primarily on managing risk rather than managing returns. **Asset Class** is comprised of securities that have similar characteristics, attributes, and risk/return relationship. Bonds is an asset class that can be divided into a smaller asset class such as: Treasury bonds, corporate bonds and high yield bonds. +-----------------------------------+-----------------------------------+ | **Traditional Asset** | **Alternative Asset** | +===================================+===================================+ | - Stocks: dividend, growth, | - Commodities: precious metals, | | value | nonferrous metals, | | | agriculture, energy, others | | - Bonds: fixed income | | | securities, it can be | - Commercial or residential | | investment-grade or junk | real estate | | (high yield), government | | | bonds, corporate bonds, long | - Collectibles such as art, | | term, intermediate, domestic, | coins, or stamps | | foreign, emerging markets | | | | - Insurance products (annuity, | | - Cash and Cash Equivalents: | life settlements, personal | | deposit account, money market | life insurance products, | | funds | etc.) | | | | | - Allocation of assets begins | - Derivatives such as options, | | from the three traditional | collateralized debt, and | | assets. | features | | | | | | - Foreign currency | +-----------------------------------+-----------------------------------+ **KEY ASPECTS OF ASSET ALLOCATION** 1. **Risk and Return Trade-off**: Asset allocation is based on the principle that there is a trade-off between risk and potential return. Riskier assets, such as stocks, have the potential for higher returns but also higher volatility, while less risky assets, such as bonds, offer lower returns with more stability. The allocation decision depends on an investor\'s risk tolerance and investment objectives. 2. **Diversification:** Diversification involves spreading investments across different asset classes, industries, and geographic regions. - By diversifying, investors reduce the impact of poor performance in one asset class on the entire portfolio. - **Diversification** can help mitigate risk and enhance the portfolio\'s risk-adjusted returns. 3. **Investment Goals and Time Horizon** - Different investment goals, such as retirement planning, wealth preservation, or capital appreciation, require varying asset allocations. - A longer investment horizon may allow for a higher allocation to growth-oriented assets, while shorter-term goals may prioritize capital preservation. **STRATEGIC VS. TACTICAL ALLOCATION** +-----------------------------------+-----------------------------------+ | Strategic asset allocation refers | Tactical asset allocation | | to the long-term allocation plan | involves making short-term | | that aligns with an investor\'s | adjustments to the portfolio | | goals and risk profile. | based on changing market | | | conditions or economic outlook. | | Both approaches are important, | | | but the strategic allocation | | | serves as the foundation. | | +-----------------------------------+-----------------------------------+ - **Risk Management**: Asset allocation is a risk management strategy that aims to mitigate the impact of market volatility on a portfolio\'s overall value. - By allocating funds to assets that perform differently under various market conditions, investors can reduce the potential for large losses. - **Rebalancing**: Over time, market fluctuations can cause the portfolio\'s asset allocation to deviate from the original plan. Rebalancing involves periodically adjusting the portfolio back to its target allocation. This ensures that the portfolio remains aligned with the investor\'s objectives and risk tolerance. - Bring portfolio back in alignment with your target asset allocation **Achieved by:** - Selling asset classes that went up - Buying asset classes that went down **REBALANCING PORTFOLIO** How to rebalance portfolio? 50/50 stocks rebalance An investor starts with a balance portfolio 50/50. Throughout the year, stocks go up 20%and bonds stay flat (0% growth). At the end of the year, stocks will make up nearly 55% while portfolio while bonds will be at approximately 45%. The portfolio is riskier at the end of the year compared to what is started since stocks is riskier than bonds. It's common for a stock market to decline after a big rise so if the portfolio has a greater investment on stocks, it could potentially experience bigger drops in declining market. - **Rebalancing** is a systematic way of selling assets that are high and buying assets that are low. - **Rebalancing** portfolio produces less risk while potentially earning greater risk. **Investor Profile**: - Individual investors have unique circumstances, risk tolerances, and financial goals. - Asset allocation should be customized to each investor\'s profile, considering factors such as age, income, family situation, and risk appetite. **VENTURE CAPITAL** **Venture capital -** funds manage pooled investments in high-growth opportunities. - **Venture capital** provides funding to new businesses that do not have access to stock markets and do not have enough cash flow to take on debts. - This arrangement can be mutually beneficial because businesses get the capital they need to boost their operations, and investors gain equity in promising companies. **STAGES OF VENTURE CAPITAL** The stages of VC investment are: 1. **Pre-Seed:** This is the earliest stage of business development when the founders try to turn an idea into a concrete business plan. 2. **Seed Funding: **This is the period where a new business seeks to launch its initial product. No revenue yet is generated, the company will need VCs to fund all of its operation 3. **Early-Stage Funding: **Once a business has developed a product, it will need additional capital to ramp up production and sales before it can become self-funding. The business will then need one or more funding rounds, typically denoted incrementally as Series A, Series B, etc. - **Angel investors** are commonly diverse group of individuals who have accumulated their wealth through a variety of sources or recently retired executives, they tend to be entrepreneurs themselves. - **Due diligence** is an investigation of a potential investment (such as a stock) or product to confirm all facts and to ensure the purchase will meet the buyer\'s demand. - Variety of factors has to be considered when performing due diligence on a stock, including company capitalization, revenue, valuations, competitors, management, and risks. - **Private Equity** is the buying of shares in a private company expecting the value per share will increase in the future. These are funds that are not publicly traded in stock exchange. The objective is to provide profit to investors 4-7 years as companies or investment managers invests to existing or new company - **Distressed Securities** are instrument issued by a company experiencing near to bankruptcy or insolvency this include common and preferred shares, bank debt, trade claims, and trade claims. - **Infrastructure** are facilities and systems serving a community or a country. Mass communications and mass transit. - **Hedge Funds** is the buying and selling of securities, trade bonds, currencies, with the aim of exceeding the returns of the market. **COMPONENT OF FINANCIAL PLAN** **Insurance** --It protects love ones against financial hardships as insurance company can help pay the medical bills, funeral expenses, and provide cash that family members use to sustain their lifestyle, finance the future education of their children. **Insurance** used the proceeds for retirement planning and develop a financial plan that has an adequate insurance coverage (health, disability, retirement). +-----------------------------------+-----------------------------------+ | - Sun Life Financial | - Philam Life | | | | | - Manulife | - Insular Life | | | | | - PRU Life UK | | +-----------------------------------+-----------------------------------+ **Cash Reserve** -- Cash reserve is equivalent to a six-month salary. - Cash reserve does not only mean the funds should be in cash, rather the funds could also be an investment that can easily converted into cash with a little chance of a loss in value. - Money market or short-term mutual funds and bank accounts is a good cash reserve. **INDIVIDUAL LIFE CYCLE** **Investor Life Cycle -** indicates the investment behavior of investor over the different age of their life. - The investment decision is based on the age, financial condition, future plans and risk characteristics of an individual. **DIFFERENT PHASES OF AN INDIVIDUAL INVESTOR'S LIFE CYCLE** 1. **Accumulation phase** --At this stage that an investor is willing to make relatively high-risk investment because of their long-time horizon. Individuals accumulate assets to satisfy immediate house down payment and children's education. 2. **Consolidation Phase --** Investors are at the past midpoint of their careers, have paid of much of all their outstanding debt, have paid or have the assets to pay their children' college bills. Earnings exceed expenses and the excess can provide for their retirement planning needs. This typical horizon of investment phase is still 20 to 30 years and moderately high-risk investment. 3. **Spending Phase --** Living expenses are covered by social security income and income prior from investment, including pension plans. 4. **Gifting Phase --** Investors have sufficient income and assets to cover their current and future expenses while maintaining a reserve for uncertainties. Excess assets can be used to provide financial assistance to relatives and friends. Accumulation Phase - Definition, How It Works, Examples **INVESTMENT PROCESS** **Investment Process** - It includes analysis of current financial situation, investment goals, asset allocation, investment strategy, management and rebalancing of the portfolio to generate maximum returns. **THE INVESTMENT PROCESS** One of the main objectives in portfolio management is to recognize the meaning and sources of risk in order to maximize the rate of return and avoid losing of money Defensive investing investment strategy to hedge against uncertain outlooks. **COMPONENTS OF INVESTMENT PROCESS** +-----------------------------------+-----------------------------------+ | 1. Goal Setting and Investment | 8\. Performance Evaluation | | Tolerance | | | | 9\. Adaptation and Adjustments | | 2. Asset Allocation | | | | 10\. Tax Planning | | 3. Research and Analysis | | | | 11\. Long term perspective | | 4. Investment Selection | | | | | | 5. Portfolio Construction | | | | | | 6. Monitoring and Review | | | | | | 7. Risk Management | | +-----------------------------------+-----------------------------------+ C:\\Users\\JoCaryl\\Desktop\\inv.rocess.png **STEPS IN THE SERIES OF INVESTMENT DECISION** 1. **WHY to buy and sell?** - Comparative historical data and information analysis from previous market performance can be a guide to the investor on why to buy or sell in the market. - For example, how does the economic environment impact our decision considering that inflation rate is low? - If environment support that market is bull, then decide to buy. 2. **WHAT to buy or sell?** - The trend of inflation attracts investors to invest. - If government policies are inflationary, we look at commodity driven (precious metals and energy) stocks, this commodity tends to appreciate in the long run. - If interest rates decline, bank stocks become attractive as people encouraged to borrow when interest rate is low, on the contrary, when interest rates rise, bank stocks become unattractive 3. **WHEN to buy or sell?** - Remember, risk relates to the probability of making money. - When risk rises, the odds of making money drop. When risk drops, the odds of making money increase. - Follow indicators to find if risk is increasing or decreasing. We need to know the current level of risk. 4. **HOW much to buy or sell** - How much to buy or sell depends on the level of risk associated with that specific asset. If the risk is high, the tendency is to sell and if the risk is very low, the strategy is to buy. - As market prices go up, the size of the investment increases because the odds of making money increase. When risk becomes too high, the same strategy is reversed **EXECUTION OF INVESTMENT PROCESS** 1. **Portfolio Review:** Before execution, review your investment strategy, asset allocation, and the specific securities you\'ve chosen. Ensure that they still align with your goals, risk tolerance, and current market conditions. 2. **Brokerage Account Setup:** If you don\'t already have one, open a brokerage account with a reputable brokerage firm. This account will be used to buy and sell securities. 3. **Order Placement** - **Market Orders**: A market order is placed to buy or sell a security immediately at the prevailing market price. It\'s a straightforward way to execute a trade quickly. - **Limit Orders**: A limit order specifies the maximum price you\'re willing to pay to buy or the minimum price you\'re willing to accept to sell. This can help you control the price at which the trade is executed. - **Stop Orders**: A stop order becomes a market order once the security reaches a specific price (the stop price). It\'s used to limit potential losses or capture gains. 4. **Diversification and Position Sizing**: If your strategy involves multiple securities, consider diversifying across asset classes and sectors. Also, determine the size of each position based on your overall portfolio allocation. 5. **Trade Execution**: Place the orders through your brokerage account, following the order type you\'ve selected. Be aware of any transaction fees, spreads, or other costs associated with trading. 6. **Rebalancing**: If necessary, execute portfolio rebalancing by adjusting the allocation of assets to bring it back in line with your target percentages. Rebalancing ensures that your portfolio doesn\'t become overly concentrated in certain assets. 7. **Regular Monitoring**: Continuously monitor your portfolio\'s performance and relevant market developments. Regularly reviewing your investments helps you stay informed and make timely adjustments as needed. 8. **Tax Considerations**: Be mindful of potential tax implications when executing trades. Selling securities at a profit can trigger capital gains taxes, so consider tax-efficient strategies to minimize tax liabilities. 9. **Documentation**: Keep accurate records of all transactions, including trade confirmations and account statements. These records are important for tracking your investment history and for tax purposes.