Investment and Portfolio Management

Investment and Portfolio ManagementLecture 111Investmentassets acquired to realize income and/or earn profitin economics, it refers to the purchase of a physical asset such as a firms acquisition of a plant, equipment, or inventory or an individuals purchase of a new homecurrent commitment of monetary unit for a period of time in order to derive future payments that will compensate the investor for the time the funds are committed, the expected rate of inflation, and the uncertainty of the future payments.2Investment Managementthe professional management of various securities (shares, bonds and other securities) and assets in order to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes e.g. mutual funds or exchange-traded funds)3The 3-Ps of InvestmentPhilosophy

Process

People4Portfoliobrief case that is used in carrying business papers and documents (in laymans term)

aggregate of assets held as investment (in business term)

Portfolio Manager the person or office given the authority to make decisions regarding the investments of an individual or entity.

5Investment Portfolio

Safety NetSavings/DepositsPaper AssetsStocksBondsMutual FundsT-BillsCommercial PapersInsuranceReal AssetsPrecious Metals and StonesReal EstateVehicle / AutomobileBusiness Assets6Portfolio ManagementThe centralized management of one or more portfolios, which includes identifying, prioritizing, authorizing, managing, and controlling projects, programs, and other related work, to achieve specific strategic business objectivesPMI, PMBOKEffective, timely, and continuing investment and governance decisions about the organizations initiatives and other structured work effort, products, and software applications- Gartner7Common Investing MistakesFailure to make financial plan for the futureMiscalculating risk toleranceFailing to keep sufficient contingency fundsJumping on the bandwagonInability to have leverageOver-diversificationErroneous timing of the marketFailure to keep a long-term perspectiveInability to cut losses8Personal FinanceManaging the financial resources of an individual and his family to improve their equity and maintaining sufficient liquidity in the processEquityLiquidity9Different Levels of WealthLevel I A family or an individual is able to meet its (his) periodic target savings goal and has adopted sufficient safety nets to ensure sufficient cash inflow and medical care in case of accidents and to ensure the continued education of the children or dependentsLevel II Portfolio must have reached that level at which periodic earnings therefrom equals the periodic target savings goal thereby bringing about an increase in portfolio value equals to double the latterLevel III Portfolio must have reached that level at which the periodic earnings therefrom approximate the savers current living cost10Level IV Portfolio must have reached that level at which the annual earnings therefrom is sufficient to cover the savers living cost based on his desired lifestyle and as adjusted for inflationLevel V Portfolio value has reached that level at which earnings therefrom can sustain more than savers annual living costs based on his improved lifestyle so that he can set up trust funds for the benefit of his children, buy another house, set up more scholarships and contribute bigger amounts to charity11Keys to Success in Personal FinanceFrugality

Vision

Safety Nets12Hodad a person who look wealthy but has zero or negative equityNever Retire Philosophy continually improving skills or knowledge to be ready to accept challenges in other jobs or undertakings even beyond retirement ageDie Broke Philosophy accumulating wealth at an early age, living well and distributing wealth leaving just enough resources to meet financial requirements in old age13Will a legal document wherein an individual states how his property should be distributed upon his deathTestator a man who dies with a willTestate dying with a willTestatrix a woman who dies with a willLiving will a document which is also called a letter of instruction wherein one sets forth his wishes as to what should be done with him in case he becomes profoundly ill or irreversibly incompetent14Personal Trust a legal arrangement whereby a person who owns financial resources entrusts them to a second party for safekeeping and management for the benefit of the designated beneficiary or beneficiariesTrustor the owner of a personal trustTrustee the party to whom the resources are transferred in trustLiving Trust a personal trust wherein benefits are enjoyed by the designated beneficiary during the lifetime of the trustorTestamentary Trust the one created by a willLife Insurance Trust the one that is created out of life insurance proceeds for the benefit of the policy holders designated beneficiaryEstate Settlement Trust the one wherein the trustee is appointed as executor of a will15Investable Cash the amount of money that an organization or individual can afford to keep in some forms of investment for a definite length of period without hampering his day-to-day operationsLiquidity Buffer the amount of cash that an entity or individual must have to take care of unexpected cash requirementsRule of 72 used in estimating the number of years it would take to halve the purchasing power of a monetary unitTSG (Target Savings Goal) how much should a person save monthly or annually in order to accumulate a desire amount at a certain point in the future16Sample ProblemsAlex Martinez is 24 years old and an employee with annual earnings of P260,000. Inflation rate is 4% per annum. How long should it take to halve his current annual earning? At the end of 5 years, how much should he be earning to maintain his purchasing power?Gina Marcos is earning P300,000 per year. If inflation rate is 5% per annum, how much should she be earning to maintain her purchasing power at the end of 10 years?

17Mr. Orense, a 26-year old employee can live comfortably on P300,000 per annum. He is intending to retire at the age of 50 and would like to know how much should he save annually so that he can maintain his standard of living even after retiring from his job. Inflation rate is 6% and average return on portfolio is 10%.Rosendo Cruz is a 22-year old marketing staff who intends to marry at the age of 31 and desires to have accumulated by then a portfolio value that will yield earnings at the rate of 10%. His current monthly cost of living is P18,000 and assumes to rise it by 50% (excluding effects of inflation) when he gets married. How much should he save to acquire the amount he needs if inflation rate is 8%?18