Personal Statement and Investments - Essay Example

Personal ment and Investments Introduction The market has a cyclical trend due to the fluctuations it experiences from time to time. These market fluctuations affect investments and make investors to lose confidence on investments. A good example is the 2008/2009 global financial crisis which affected investments adversely. In order to safeguard investments from the market risks, investors should maintain a portfolio. An investor should be in a position of knowing how to allocate assets that meet personal goals and strategies. This means that the portfolio selected should meet future capital needs. An analysis of the portfolio is also vital as it studies the performance of different assts under different circumstances. Portfolio analysis helps investors in making decisions when investing (Birt and Boland, 2010). In most cases, a rational investor will choose a portfolio that is made up of high returns and low risk. In reality, assets with high returns usually have a high degree of risk (Reilly & Brown, 2011). Therefore, strategies should be adopted when constructing a portfolio. Portfolio analysis requires a high degree of subjective judgment. It is a process which is time consuming and involves a lot of effort. This is because it entails an analysis of each and every asset. Construction of a Portfolio Different investors have different tastes and needs. Therefore, it is wise to construct a portfolio that best suits your expectations. A portfolio to be constructed should be characterized by high returns and moderate risk. It is should be well diversified in order to minimize the degree of risk. The first step towards the construction of a portfolio is assessment of one’s expectations and attitude towards risk. Generally, there are two types of investors; the aggressive investor and the conservative investor. An aggressive investor is an investor who is willing to take more risks by devoting larger portions to equity and less to bond and other fixed income securities. On the other hand, a conservative investor takes less risk as his main personal goal is to protect value. An aggressive investor aims at maximizing returns by accepting more risk. A moderately good portfolio is one which satisfies an average risk tolerance, attracting those willing to accept more risk in their portfolios in order to achieve a balance of capital growth and income. Therefore, as an investor you should be in a position of knowing the category where you suit. In this report, we will construct a portfolio that best suits an investor’s expectations. The portfolio to be built will have 10 international securities drawn from a list of stocks and mutual funds. For stocks portion, we will use the sector level and select companies which have the largest market capitalization in major markets. The aspect of growth is very important to any investor thus we will consider sectors that have the capability to grow and then select the most promising companies in these sectors. Mutual funds allow investors to hold equity and bonds that have been professionally researched; therefore two products ensure high returns on stocks and low risk element from bonds. In the case of mutual funds, we will consider mutual funds with high growth levels from different sectors of the economy. Mutual funds have high regulations which do not allow use of derivatives or short selling. The final batch of the portfolio will contain securities with highest returns and a moderate level of risk. Yahoo Finance will be used as the trading platform and the main source of information to ensure that data collected is accurate. Other sources of information such as Wall street journal’s, New York Times and Financial Times can be used in collecting information for certain market trends and any other latest news. Stocks Selection Initial Stocks have been selected from the best performing sectors as demonstrated below by the bar graph. From the bar graph above, the sectors with the lowest performances and growth percentages are the energy and basic material sectors. The best performing sector is the financial sector followed by the consumer sector and industrial goods sector. These three sectors display potential growth in the near future. Growth in various sectors might have been caused by several reasons such as increase in GDP. In selecting stocks that make up the portfolio, factors such as price, market capitalization, Alpha and the price earnings ratio (P/E) will be considered. The stocks selected are five in total from the financial and technology sector. The stocks have a market capitalization of above $500 million. Mutual funds Selection The first step towards mutual fund selection was to determine the asset class. For example, Classes may be including large-cap funds, small- and mid-cap funds, bond funds, cash-equivalent funds, real estate funds. In selecting the mutual funds, several factors have been taken into consideration. To begin with, returns on investment both recent and historical. The relative performance of the mutual funds has been taken to consideration by comparing performance of different time periods. Thirdly, consistency in performance of the funds has been a factor in the selection process. In determining the consistency, the average yearly returns and performance during bear and bull markets was considered. The fund chosen have good performances year after year. All these factors have been used in assessing the quality of the mutual funds. The mutual funds selected are from different asset classes. The main reason of selecting from these classes is to diversify the portfolio so as to reduce the element of risk. The funds selected are five in total and from different asset classes. Performance Evaluation The share prices usually have a cyclical pattern as they fluctuate from time to time. From the portfolio constructed the share prices have an up and downward movement at different times. Looking at the annualized returns on the stocks of the portfolio, they are positive figures. This means that their performance in a good one despite of the downward movement in the prices. Performance of stock prices is triggered by internal and industry factors. Factors that might have influenced stock prices are: Introduction of a new product by the companies. New products lead to more revenues if the product gets a positive response from customers. Improved performance in the general sector that the company belongs to. For instance, in our portfolio the stocks have been chosen from sectors that have been performing well from time to time and with a degree of consistency Market sentiment. This means that the share prices are influenced by the market direction during the season. During bear markets, stocks prices will fall and during bull markets, stock prices rise. Earnings results of the company determine the share prices. Investors usually assess a company based on the earnings per share and revenue taking into account future potential growth. Generally, companies report earnings in each quarter and if the results ar good, investors expect share prices to rise and vice versa. The company may also issue guidelines on EPS and revenue in coming years. This helps investors in monitoring the share prices. Take –over and mergers. A company that has been taken over usually receives a boost in its share price. The same case applies to mergers. Share buy-back, Dividends, and Stock splits. When companies engage in share buyback, the number of shares available in the open market is reduced. Applying the rule of supply and demand, a reduction in the volume of shares available in the open market leads to an increase in the share prices. Stock prices may also increase to an amount close to the dividend per share value. On the other hand, mutual funds in the portfolio have negative annualized returns showing a weak performance. The fund though shows potential growth in future. An economic analysis will be done in order to assess the factors that have triggered portfolio performance during 15/10/2012 and 15/12/2012. Economic /Market Analysis In this analysis, major economic indicators such as; GDP, oil consumption and prices, employment and other indicators will be evaluates. Gross Domestic Product From the above bar graph, the GDP was positive in 2007 and negative in 2008 and 2009 due to the global financial crisis. In 2010, the GDP gained momentum and started to rise again at a slow pace. In early 2011, the GDP drastically fell down since the effects of the 2008/2009 recession were still being felt and picked up towards the year end. In year 2012, the GDP continued to rise and this is evident in the second and third quarter. In the second quarter, the GDP rose by 2.7 percent, the fastest growth ever since year 2011. The growth had been accelerated by increased investments in inventories particularly ones in the wholesale and manufacturing. Increase in Consumer spending especially on durable commodities such as motor vehicle and spare parts also contributed to the rise in GDP. Consumer spending on household goods decreased on the contrary by 1.4 percent. Also, consumer spending on software and equipments was the lowest in that quarter. Exports for industrial supplies and materials increased and deficit on imports was experienced. Government expenditure increased and as a result, GDP also increased. In this quarter, the GDP rose by 3.1 percent (Crujo 2012). Housing In October the pending home resale’s index rose by 5.2 exceeding the highest estimate by Bloomberg’s survey economists. The quarterly report from the firming housing market shows that more contracts to buy previously owned houses were recorded. Oil Oil consumption also rose in the last quarter for 2012 as a result of increased GDP. In the New York exchange crude delivery rose to $1.58 to settle at $88.07 per barrel in January. This month of November, the prices went up by 2.1 percent. In London based ICE futures exchange, prices rose by 1.1 percent and settles at $110.76 per barrel in January. U.S is the largest consumer of global oil by 20%. Statistical review of world energy indicates that overall consumption currently raised to 21% a consumption of 18.8million barrels in a day. Employment Rate There rate of unemployment in America are still dominant in the United States of America. Below is a current histogram showing the ratio of the whole population to the employed. From the above graph, the ration of the employed to the whole population continues to fall year by year. This means that most of the population is unemployed. Approximately there are 154.5 million people in the U.S who are employed. The government is largest employer with 22 million. Small businesses account for 53% of the workers while large businesses account for 38% of the workforce. Generally, small business account for 99% of all employing organizations. The ratio of employed by small to large businesses is the same each year as small businesses convert to large. Therefore, the number of employment each year is less. The living standards might as a result become poorer. Debt As at this quarter, U.S public debt stands at $16.158 trillion forming 100.37% of the GDP. This is worrying as it has taken a large percentage of the GDP. This may slow down economic growth. The economy momentum has picked globally even though but 2008/2009 effects and contradictions have not been fully resolved. Therefore, there is a probability of another recession occurring in future due to: The huge amounts of household debt which are unpaid, especially debt on mortgages. The global capitalist crisis for example most immediate European crisis which will reduce exports in the U.S market and destabilize its financial system. Introduction of a policy by the U.S government which forced expenditure at the federal, state and local level to be cut. As result the Gross domestic product (GDP) went down by almost one-half percent in 2011. It might also cause more harm in future. Increase in unemployment rates, inequality rates and growing power of financial capital. Results will be instability and global struggle for capitalism. Suggested Changes or Adjustments In this report, we managed to build a portfolio that met our expectations. However, there are other strategies that can be used. First, consider adding risk free assets into the portfolio such as short-term bonds. Short selling of specific assets can be considered but through maintenance of a borrowing position. Diversification can be increased by shifting of funds among different equity sectors and industries. Also, the number of securities in the portfolio can be increased further to at least 30 securities to increase diversification. The portfolio constructed has 10 securities Another strategy is by using the mean variance rule (Elton et al, 2009). The aspect of risk and return should also be considered in constructing the portfolio. In most cases, the assets having the highest returns have high risks. The mean –variance analysis is used in identifying risk and return according to Markowitz (2000). Markowitz introduced the concept of the mean-variance rule in the year 1952. The lowest level of risk is chosen for a particular rate of return (Markowitz, 2000). The concept of the efficient frontier can also be incorporated. In 1972, Merton came up with the concept of efficient frontier. An efficient frontier comprises of a set of optimal portfolios lying on a parabola in the mean variance space. The efficient frontier has a set of portfolios with different weights. to get the expected return of a portfolio the sum total of individual weights in the portfolio is determined first. The portfolio can be evaluated by use of a benchmark portfolio. If the portfolio outperforms the benchmark portfolio, then it is considered to be a suitable portfolio. Conclusion Portfolio analysis helps in choosing assets that give greater return and have low risk. Diversification is an important aspect in portfolio analysis. Therefore, a portfolio should be well diversified in order to ensure long-term growth in investments (Brigham & Houston 2009). Diversification reduces the degree of risk in the portfolio. It is recommendable for the investor should monitor the diversification in the portfolio and if necessary make some adjustments. References Crujo, A., 2012. U.S. GDP Growth rate. Bartol, Kathryn M, 2011. Management: A Pacific Rim Focus.6th Edition. McGraw- Hill Australia, 2011. Birt G., and Boland. G, 2010. Accounting: Business Reporting for Decision Making. Wiley and sons publishers. Elton E.J, Gruber M.J, and Brown S. J, 2009. Modern Portfolio Theory and Investment Analysis. Wiley publishers Elton. E.J, Gruber. M.J, Brown S. J., and Goetzmann, 2006. Modern Portfolio: Theory and Investment Analysis. Cram101 Incorporated Elton, E.J. et al., 2010. Modern Portfolio Theory and Investment Analysis, 8th Edition, Wiley [ISBN: 0470505842] Brigham E.F, and Houston J.F, 2009. Fundamentals of Financial Management. Cengage Learning. Francis, J. C. and Ibbotson, R. G., 2002. 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