Building Personal Portfolio - Essay Example

Building Portfolio due Building Portfolio In developing an investment portfolio, one is required to evaluate and consider various available opportunities in the investment opportunities. This is because different investments suit different classes of people at different times in the cycle of their lives. As such, there are various points to consider which include: duration of investment, criteria for deciding the mix of investment - whether it is in equity, property, bonds or cash and finally, the frequency of reviewing the investment portfolio. It is clear that there are four main assets where an individual could invest in developing a portfolio ranging from cash through equity and bonds to property. Obviously, each investment will have its own risks and benefits, but it is necessary to come up with a combination of most of these as a way of spreading the risk so as to have a generally safe investment portfolio. The performances of different types of assets are always different and unique, but then there exists a generalization that equities usually perform better than all the other three if they are considered over a long period of time. However, each investment opportunity is better suited at a given stage in life. It can further be shown that different investments have different risks and different levels of returns, i.e. their potential to pay back. Cash Bonds Property Equities Risk Low Low-Med Med-High High Potential return Low Low-Med Med-High High Suggested minimum investment duration Short term 3 years 5 years 5-10 years Table 1: Investment Risk on various securities The investment opportunity has developed a concept called fidelity which offers valuable information to investors through an accessible mode on all the four assets of investment. This is done through the managed fund. The investor buys the managed fund and will find the company from where he has chosen fund buying assets on their behalf. The company will combine various asset classes that exist within the fund and so the individual does not need to assess or track the performance of the asset, since the risk is well spread out by diversifying. It is important to understand the details of the risk and benefits as well as the availability of each kind of asset before one can decide to develop an investment portfolio. Equities When one is investing in equity, the person is investing the ownership of a given traded company. Equity is also known as share investment and will involve the person buying a stake or shares in that company. The person owns the company and therefore, shares in its success and failures as a part owner of the enterprise. Equity investment has a lot of benefits associated with it. Those equities can most of the times increase in value very significantly thus, increasing the value of the investment of the investor. Secondly, due to the fact that dividends are always paid to equity holders when the firm makes profits, they will always increase with increase in profits in the firm. The investor has options of whether to reinvest back the dividends or receive them as paid out income. The overall advantage of equity over the other kind of investment is that they often tend to perform better than any of the other four asset classes for over a long period of time, and this makes them a safe invest for long term investment. While investing in equity or shares, it is worth considering that they at times fall significantly in value due to the uncertainties in the market conditions, and more especially, preference and consumer impact on the business activities of the company. Changes in social trends also cause this fluctuation. The significant fall in value of equity can only mean one thing- loss of investment. Though good in the long term, there is always a great difficulty in predicting what will happen to an investment in the short term. Such is the unpredictability that a hasty investment in equities will always result into greater losses to the investor, especially if it was for the short term. Various factors will always affect the performance of equities, especially political atmosphere which will cause the value to behave unsteadily. Equity holders can always get anticipated dividends if the company makes profits, but this might not be forthcoming, especially when the company is facing difficulties and the dividends have to be cut so as to relieve the company of such financial strains. The arrangement is always such that equity holders being owners of the company will always have a last treatment and so will receive something only when the company is in good shape. Since the share prices of equity will always be fluctuating due to a handful of reasons, the investment proves more risky than any of the other three. The major advantage, therefore, is that they offer the best opportunity for growth if one wants to invest for over a long period of time while at the same time reinvesting the income obtained from such investment. Equity funds Since it is clear that investing in equities is more risky, the situation can well be mitigated by investing through established equity funds. It is the role of the fund manager to select a range of equities to invest in after considering all the market forces. The investor, therefore, does not need to worry about the performance of the equities, since the risk is diversified. Many companies are involved in that, so focus is not made on the equities of one particular company. The investor does not struggle to choose which equities from which companies could be the right ones, but leaves this to the experts whose job is to monitor all the equities in the stock market throughout and use other factors to predict their performance. The equity funds that are available can either be categorised as growth funds or income funds. Growth funds are always aimed at achieving long term growth in capital. In this case, the fund manager will only select those companies which show greater potential to increase their share prices over the investment period. Income fund has the objective of providing good investment returns for investor. They consider companies known to them to provide regular dividends. It can also be determined that the share prices of these companies are not as volatile as those considered for growth. Bonds As generally defined, Bonds are loans that are issued by companies (corporate bonds) or by governments (treasury bonds as in the US) to help them raise money. They could be considered as promissory notes which are undertaken to pay back your money or loan at a future date and at a given fixed interest rate. Bonds are considered to be safer as the interest rate is fixed with very minimal probability of the government or companies defaulting in repayment. However, it is safer when investing in government bonds-treasury bills and Gilts, as opposed to company bonds. This is because there is no way the government will default on repayment while companies can fail to repay the interest. Benefits of bonds Bonds have their interest pre-set and are always paid in a regular fashion. This makes it easy for financial planning as one is able to target the availability of the funds when the bonds are scheduled to mature. Secondly, if the bond is in an open market, its value may go which is a bonus to the investment (Iijournals.com). This is because the value is also influenced by prevailing market conditions and terms. Compared to equity, bonds are more advantageous, since most companies or firms would want to pay off interest on bond first, and later on pay the dividends on equity. They are considered first. When investing in bonds, I will have to consider the more secure ones which are the government bonds as opposed to company bonds. This is because the companies might default in making payments of interests or the loan amount at the scheduled maturity. Also, bonds in the open market may have their value gone down and this will result into unforeseen loss in investment. Cash Cash accounts appear to be the safest mode of investment because the person can always access the money whenever they need it. There is regular interest paid on the amount saved in with a financial institution. The investment is only good for short term undertakings where no growth is actually expected. Though safe, it offers very low potential for growth compared to the other three. The other aspect of cash investment into bank accounts is that it is greatly affected by inflation on the tax rates which will render the returns on savings to be less significant. Cash investment is beneficial in the sense that it is secure, but not as secure as bonds, it is easy to access and get back your money and the interest on investment will always be paid. This is because it is money loaned to the bank. However, when investing in the bank savings, one needs to consider that the rates of interests are always variable depending on the monetary policies and prevailing business environment (Iijournals.com). There are also restrictions on the limits within which the investment can earn good amount of interest. I must also consider that there are certain types of accounts which may cause me penalty if I do not give notice of withdrawal hence the account features and terms become a key factor. Though money will not be lost, inflation will erode the value of investment by reducing the actual value of the money at one particular instance. Property Property where people can invest in, include houses where people reside or holiday homes. These are good investments since the value of property has always been on appreciation. The benefit of property is in the dramatic rise in prices and value as well as the sense of security in terms of residence. However, while investing in property it is important to realize that the value of property depends on opinion and not fact and may result in fall in prices. Further, the mortgage to be paid on property is high and so are the maintenance costs. For those who invest in property-to-let, to find tenants at times might be difficult which will render the property uneconomical. We should also realize that investing in property will require large amounts for individual investment which will all be tied here (Gardner & Gardner, 2009). Disposing off the property to recoup the investment is hard legal battle, and this makes the investment a bad one where money might be required fast. My portfolio Based on the foregoing analysis and considering the risks and returns, my portfolio will choose to invest the given amount on bonds and equity or stock. Investment on bonds will be up to 60% of the total investment which will be spread across bills and notes. This is because I am considering an investment for less than ten years with a possibility of reinvesting the returns. The bills will also ensure growth of my capital during that period and with the necessary security. Further by investing in notes, I would be assured of getting money within the shorter period just in case I might need it for investment in another perspective. The amount to the proportion of 60% is allocated due to the high minimum requirement expected in bonds. The remaining 40% will be dedicated investment in stock. This will ensure being able to share in the profits of the companies that are doing well and which declare dividends annually. This will ensure continuous growth in capital. The 40% is also due as a long term investment. Security Type Unit value Minimum Amount Rate of Return Amount Duration BONDS Bills $1,000 $5,000 0.11 yield $10,000 1 year Notes $1,000 $10,000 0.84 yield $20,000 5years EQUITY Safeway Inc. $21.19 500 shares Dividends $19,918.6 Irregular Table 2: My Investment Portfolio From the portfolio, it is realized that Equity represents 39.84% of the total investment amount while Bonds represent 60%. The total of the two come to 99.84% which leaves approximately 0.16% of the investment amount pending. This is equivalent to $81.4 Equity for Safeway Inc. has been picked based on the company’s steady performance last week, which indicates stability. The amount of returns on the short-term investments will always be reinvested. Based on this plan, the risk that will be caused due to fluctuation in share prices is minimised, while the long duration of investment is mitigated by the treasury bills. References An Optimization Strategy for Enhancing the Performance of Fund-of-Funds Portfolios. The Journal of Portfolio Management . (n.d.). Retrieved April 15, 2012, from http://www.iijournals.com/doi/abs/10.3905/jpm.2012.38.2.147 Can Investing in Volatility Help Meet Your Portfolio Objectives? The Journal of Portfolio Management . (n.d.).Retrieved April 15, 2012, from http://www.iijournals.com/doi/abs/10.3905/jpm.2012.38.2.082 Factor Alignment Problems and Quantitative Portfolio Management. The Journal of Portfolio Management . (n.d.). Retrieved April 15, 2012, from http://www.iijournals.com/doi/abs/10.3905/jpm.2012.38.2.029 Gardner, D., & Gardner, T. (2009). The Motley Fool million dollar portfolio: how to build and grow a panic-proof investment portfolio. New York: Collins Business. Read More