Theory of the investment portfolio

With an investment portfolio you have your money in a diversified range of funds from different time horizons and types of debt instruments and equities, which can help you maximize your results and reduce the impact of volatility.

Nowadays it is essential to convert your traditional savings into a true investment strategy, where following a proper diversification of assets, the best performance is achieved within selected instrument.

Investments either short or long term, represent loans made by the company to get a return on them or receive dividends that help to increase the capital of the company. The short-term investments are loans which are practically effective at any time unlike the long term which represents a little more risk in the market. Although the market price of a bond may fluctuate from day to day, you can be certain that when the due date arrives, the market price will equal the maturity value of the bond. The actions, on the other hand, have no values of maturity.

When the volatility in very low in market, there is no certain way to tell whether the decline is temporary or permanent. For this reason, different valuation rules apply to accounting for investments in marketable debt securities (bonds) and marketable equity securities (shares). When bonds are issued at a discount, the maturity value of the bonds exceed the amount originally borrowed. Therefore, the discount can be considered as an interest charge included in the maturity value of the bonds. The amortization of this discount over the life of the bond increases the periodic rate of interest.

There is a difference between saving and investing. Saving is setting aside a portion of income, that you have not spent, which may or may not increase depending on savings instruments you employ. The basic difference is that investment through savings does not require initial capital risks in theory (because there is always the effect of inflation), and the value of that capital does not decrease. Investment on the contrary involves taking a risk with the initial capital. It may increase or decrease depending on the instruments used.

In 1952 Harry Markowitz led to the Modern portfolio theory and modern theory of portfolio selection which is an investment theory that studies how to maximize return and minimize risk through an appropriate choice of the components of a portfolio of securities, where he proposed that the investor should address the portfolio as a whole, studying the characteristics of risk and overall return, instead of choosing individual securities under the expected return of each security in particular.

Objectives of investments

The establishment of the investment goals begins with a detailed analysis of the investment objectives of the institution or individual whose money is going to be handled.

Objectives of individual investors:

Among the individual investors the objectives are: the accumulation of funds to buy a house, having enough money to retire at a certain age or accumulate funds for college education of children.

Objectives of Institutional investors:

Among others, Institutional investors include, pension funds, financial institutions, insurance companies, mutual funds, etc. and investment objectives differ according to how they operate.

Institutional investors can be classified into two major groups: those who must comply with specific contractual liabilities and those who do not have to meet any specific liabilities.

Investment policies

The establishment of investment policies is part of the process in which guidelines are set to meet the investment objectives. The establishment of investment policy begins with the decision of allocation or division of assets “Asset Allocation”.

“Asset Allocation” is deciding how the funds of the Institution or Individual will be distributed between the different asset classes. These assets mainly include: Stocks, Bonds, Real Estate, Securities and Foreign Currency.

To develop Investment Policy, the following factors should be taken into account:

  • Liquidity requirements
  • Investment Horizon
  • Tax Considerations
  • Legal Restrictions
  • Regulations
  • Financial Reporting Requirements
  • Customer preferences and needs

You must select a portfolio management strategy consistent with the objectives and investment policies of clients, ie, consistent with their requirements for profitability and risk tolerance. The portfolio management strategies can be classified as active or passive.

An active portfolio management strategy uses available information and projections techniques to obtain higher returns than a portfolio that is simply diversified.

A passive portfolio management strategy involves minimal input and relies on diversification to match the performance of a particular market index. Additionally, there are structured portfolio strategies designed to achieve the performance of predetermined liabilities that must be paid at a future date.

Given the alternatives, the selection of an active, passive or structured strategy will depend on the following factors:

  • The customer view about market efficiency.
  • The risk tolerance of the client.
  • The nature of the liabilities of the client.

Portfolio of investments

Investment Portfolio is a selection of documents or values that are traded on the stock market and in which a person or company decide to place or invest your money.

Investment portfolios are integrated with the various instruments that the investor has selected. To make your choice, you should take into account fundamental aspects such as the level of risk you are willing to take and the goals which seeks to achieve with your investment. Of course, before you decide how to integrate the portfolio. you need to be very familiar with the tools available in the stock market to choose the most suitable options, according to your expectations.

The investment decision is not something that should be taken lightly. The investor has to choose a path among several, that might affect their present and future financial prospects. It is also important to understand that investing, although the term implies risk or uncertainty of results, it does not mean it is a game. Investment can be translated as a long-term result with a careful analysis of various options, and expectation of profit in the future.

Investment exists because it is the means to accomplish a goal, so the best portfolio or portfolio investment is that, as an investor, you have to design it according to the level of risk you are willing to take, according to age, the amount of money you have to invest and to the type of business that you own. It may seem to be an easy and immediate task but it is not. All you need to do is build up an investment plan. This plan provides an overview of your current financial situation and the financial situation that aspires to achieve in the future. Your plan should reflect the time horizon, your financial situation and your personal risk tolerance.

Furthermore, a fundamental premise of financial investment is diversification which is the best way to reduce investment risk. The main objective of any investment portfolio is to achieve a balance. A good investment portfolio should be able to cover the risk of the assets more aggressively and with other, a little more conservative. Hence arises the importance of diversification, which is the cornerstone to achieve the goal of any investor.

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