Summary
With an investment portfolio you have your money diversified in a wide range of Funds of different terms, horizons and types of debt and equity instruments, which can help you maximize your results and reduce the impact of volatility.
Nowadays, it is essential to turn your traditional savings into a true investment strategy, where following a correct diversification of assets, the best possible return is achieved in the chosen term.
Abstract
With an investment portfolio you have your money in a diversified range of funds from different periods, horizons and types of debt instruments and equities, which can help you maximize your results and reduce the impact of volatility.
Today it is essential to turn your savings in a real traditional investment strategy, where following a successful diversification of assets, the best performance possible within chosen is achieved.
Introduction
Investments, either short or long-term, represent placements that the company makes to obtain a return on them or receive dividends that help increase the capital of the company. Short-term investments, if you like, are placements that are practically effective at any time, unlike long-term investments that represent a little more risk within the market. Although the market price of a bond can fluctuate from day to day, you can be sure that when the maturity date arrives, the market price will equal the maturity value of the bond. Stocks, on the other hand, have no expiration values.
When the market price of a stock falls, there is no certain way to tell whether the decline will be temporary or permanent. For this reason, different valuation standards are applied to account for investments in marketable debt securities (bonds) and in marketable equity securities (stocks). When the bonds are issued at a discount, the maturity value of the bonds will exceed the value originally loaned. 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 issue increases the periodic interest expense.
There is a difference between saving or investing. Saving is the act of setting aside a portion of income without having it, without spending it, which may or may not increase, depending on the savings instruments to be used. The basic difference with investment is that by saving the initial capital is not risked, in theory (because there is always the inflationary effect) the value of said capital does not decrease. On the contrary, the investment implies taking a risk with the initial capital, which, depending on the instruments to be used, may increase or decrease.
Background
In 1952 Harry Markowitz originated the The modern theory of the portfolio or modern theory of portfolio selection 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 proposes that the investor must approach the portfolio as a whole, studying the characteristics of risk and global return, rather than choosing individual securities by virtue of the expected return of each particular security.
goals
The establishment of investment objectives begins with detailed analysis of the investment objectives of the institution or individual whose money is to be managed.
Among the objectives of individual investors are: accumulating funds to buy a home, having sufficient funds to retire at a certain age, or accumulating funds to pay for children's college education.
Institutional investors include, among others, pension funds, financial institutions, insurance companies, mutual funds, etc. and their investment objectives differ according to their functions.
Institutional investors can be classified into two large groups: those who must meet specific contractual liabilities and those who do not have to meet specific liabilities. (Méndez, 2010).
Policies
The establishment of investment policies is the part of the process in which guidelines are set to satisfy investment objectives. The establishment of investment policies begins with the decision to allocate or distribute assets "Asset Allocation".
Asset Allocation is the decision of how the funds of the Institution or Individual will be distributed among the different asset classes. These assets mainly include: Stocks, Bonds, Real Estate, and Securities in Foreign Currency.
To develop the Investment Policies, the following factors should be considered:
- Liquidity Requirements Investment Horizon Tax Considerations Legal Restrictions Regulations Financial Reporting Requirements Client Preferences and Needs
A portfolio management strategy must be selected that is consistent with the client's investment objectives and policies, that is, consistent with their profitability requirements and risk tolerance. Portfolio management strategies can be classified as Active or Passive.
An active strategy uses available information and forecasting techniques to obtain higher returns than a portfolio that is simply diversified.
A passive strategy involves a minimum contribution and is based on diversification to match the performance of a given market index. Additionally, there are structured portfolio strategies designed to achieve the performance of predetermined liabilities that have to be canceled at future dates.
Given the alternatives, the selection of an active, passive or structured strategy will depend on:
- The client's view of market efficiency The client's risk tolerance The nature of the client's liabilities
Investment portfolio
Also called an Investment Portfolio, it is a selection of documents or securities that are listed on the stock market and in which a person or company decides to place or invest their money.
The investment portfolios are integrated with the different instruments that the investor has selected. To make your choice, you must take into account basic aspects such as the level of risk you are willing to take and the objectives you seek to achieve with your investment. Of course, before deciding how the portfolio will be integrated, it will be necessary to know very well the instruments available in the stock market to choose the most convenient options, according to your expectations. (Gallardo Cervantes, 2002)
conclusion
Investment decision making is not something to be taken lightly. The investor has to choose one path among several; That choice will influence your financial ability, present and future. It is also important to be clear that investing, although the word risk or uncertainty of the results is implicit, it does not mean a game.
The investment can be translated as a long-term company, the result of a careful analysis that is carried out with the expectation of obtaining some benefit in the future.
Investment exists because it is the means to meet an objective, so the best portfolio or investment portfolio is the one that the investor himself designs according to the level of risk that he is willing to face, according to age, the amount of money you have to invest and even the type of business you have. It seems like an easy and immediate task but it is not, hence the importance of building an investment plan. This plan presents a general description of your current financial situation and the financial situation you hope to achieve in the future. Your plan should reflect the time horizon, your financial situation, and your personal tolerance for risk. Set goals and design an investment plan as soon as possible outlines the investment plan,The longer the time your money works for your investment benefit. The goals that the investor set will determine the horizon of his investment. Your time horizon is important because it influences your asset investment strategy. A long-term investment horizon allows you to take more risk as the effects of market ups and downs tend to subside over time.
On the other hand, a fundamental premise of financial investing is that diversification is the best way to reduce investment risk. The main objective of any investment portfolio is to obtain a balance. A good investment portfolio must be able to cover the risks of the most aggressive assets with others that are a little more conservative. Hence the importance of diversification arises. This element becomes a fundamental piece to achieve the goal of any investor to obtain a profit from the investment he made.
Bibliography
- Gallardo Cervantes, J. (2002). In Economic and financial evaluation (p. 213). Mexico DF: UNAM.Méndez, D. (2010). In THE FINANCIAL PLANNING PROCESS (pp. 64,65). USA: AUTHOR HOUSE.
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As a culmination we leave you with the following series of video-lessons, from the master in stock market and capital markets of the ENyd Business and Management School, through which you will be able to learn more about risk and profitability, diversification and the procedure for managing wallets. A good complement to expand your knowledge of portfolio theory. (2 videos - 1 hour and 55 minutes)
