Investment Concept & Portfolio Management Process

Why do people invest?

Investing can be defined as the act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit.

Some invest to seek income streams to supplement their primary source of income.

Some invest for capital growth to build their wealth over time and protect against inflation

Investing requires a more thorough understanding of how the market works and making informed decisions based on this knowledge.

We need to understand the relationship between risk and return.

Return is the benefit to the investor resulting from an investment of some assets.

Risk is the chance that an investment's return will be different than expected.

Low risks are associated with low potential returns.
High risks are associated with high potential returns.

A common misconception is that higher risk equals greater return

There are no guarantees.

Higher risk also means higher potential losses.

What level of return or risk is most appropriate to an investor?

It depends on the

• goals
• income
• a personal situation
• life stage
• risk appetite
• marital status
• family situation

Portfolio Management Process for individual investors

a) Investment Objectives

An investment is made because it serves some objectives for an investor

Safety
- less concern on return

Stable Income
- dividend and interest income
- normally growth is slower

Growth
- capital gains
- accumulate capital for future needs, e.g education or retirement funding
- higher growth potential come higher risks

Liquidity
- refers to the need for an investor for cash excess of any savings or new contributions available at a specific point in the future

Example

Planned: Child's university funding in 10 years

Unplanned: Medical emergency

Achieving a degree of liquidity may sacrifice a certain level of income or potential for capital gains.


b) Defining the objectives for component parts of the portfolio

A portfolio by definition is a combination of a minimum of two securities.

Equity Portfolio
A portfolio with equities only

Bond Portfolio
A portfolio with bonds only

It can be a combination of equities and bonds or other types of financial assets.


c) Investment Management Process

The steps:

• Analyze current position
• Formulate investment policy statement (IPS)
• Allocate and recommend investment
• Implement the recommended investment
• Monitor and review investment

i) Analyze current position

• Review and analyze investment and planning objective
• Goals and needs
• Investment horizon
• Tolerance for risk
• Review changing tax, regulatory and financial environments
• Accommodate for any financial, legal or social constraints

ii) Formulate investment policy statement (IPS)

- Basic factual information
Check how much current investment's assets and the amount under management
Any trustees or interested parties to the account

- Understand investment objectives, time horizon, anticipated withdrawals or deposits, need for reserves or liquidity, and tolerance for risk and volatility

- Constraints for the assets, such as liquidity and marketability requirements, diversification concentrations and those transactions that are prohibited

- Types of securities and assets to be included, basic allocation among assets categories and the variance (rebalancing) limits for this allocation

- The methods of monitoring the investments and the benchmarks to be used to measure the investment performance

For those of you that want to understand the theoretical part of Portfolio Management, you can watch this amazing lecture from MIT.

Happy Investing! 😉