Notre Dame of Midsayap College

Midsayap, Cotabato
COLLEGE OF BUSINESS AND ACCOUNTANCY
FM 42 INVESTMENT AND PORTFOLIO MANAGEMENT
Lesson 1
Research Work
Class Schedule: TTH 8:30-10:00 A.M.

Submitted by: Bena B. Jagonob

Submitted to: Mrs. Sarah Jane B. Orillosa, MBA
1. Define the following:
Investment Management
Investment management also referred to as money management, portfolio management or
private banking covers the professional management of different securities and assets, such as
bonds, shares, real estate and other securities. Proper investment management aims to meet
particular investment goals for the benefit of the investors. These investors may be individual
investors referred to as private investors who have built investment contracts with fund
managers, or institutional investors who may be pension fund corporations, governments,
educational establishments or insurance companies.

Investment
An investment is an asset or item that is purchased with the hope that it will generate income or
will appreciate in the future. In an economic sense, an investment is the purchase of goods that are
not consumed today but are used in the future to create wealth. In finance, an investment is a
monetary asset purchased with the idea that the asset will provide income in the future or will be
sold at a higher price for a profit.

Money market
Money market basically refers to a section of the financial market where financial
instruments with high liquidity and short-term maturities are traded. Money market has become a
component of the financial market for buying and selling of securities of short-term maturities, of
one year or less, such as treasury bills and commercial papers.

Risk tolerance
Risk tolerance is the specific maximum risk that an organization is willing to take regarding
each relevant risk. Risk tolerance is an important component in investing. You should have a
realistic understanding of your ability and willingness to stomach large swings in the value of his
investments; if you take on too much risk, you might panic and sell at the wrong time. Usually
gauged by a calculator or questionnaire, risk tolerance is often used to categorize investors as
aggressive, moderate or conservative.
Investment Portfolio
An investment portfolio is a collection of investments. Ideally these investments were
chosen to work in harmony to help the investor achieve their goals and also to provide a certain
degree of diversification so that you are not putting all your eggs in one basket. An investment
portfolio is a combination of asset classes such as stocks, bonds and cash. The portfolio might be
further divided into sub-asset classes like large cap stocks, mid-cap stocks, small cap stocks and
international stocks. On the bond side you might have some short-term bonds, intermediate-term,
tax-exempt municipal bonds and foreign bonds. Each asset class and sub-asset class can be further
sub-divided.
 Financial Market
Financial markets are where traders buy and sell stocks, bonds, derivatives, foreign
exchange and commodities. These markets are where businesses go to raise cash to grow,
companies reduce risks, and investors make money. Although some financial markets are very
small with little activity, some financial markets including the New York Stock Exchange (NYSE)
and the forex markets trade trillions of dollars of securities daily.
Financial markets create an open and regulated system for companies to obtain large
amounts of financial capital to grow their businesses. This is done through the stock and bond
markets. Markets also allow these businesses to offset risk with commodities and foreign exchange
futures contracts, as well as other derivatives.

2. What are the different forms of investment? Which would you prefer? Why?
The following are some of the different forms of investment:
Stocks
Buying shares of stock represents ownership in the company and the opportunity to
participate in the companys success via increases in the stocks price plus and dividends that the
company might declare. Shareholders have a claim on the companys assets.
Holders of common stock have voting rights at shareholders meetings and the right to receive
dividends if they are declared. Holders of preferred stock dont have voting rights, but do receive
preference in terms of the payment of any dividends over common shareholders. They also have a
higher claim on company assets than holders of common stock.
Bonds
Bonds are debt instruments whereby an investor effectively is loaning money to a company
or agency (the issuer) in exchange for periodic interest payments plus the return of the bonds face
amount when the bond matures. Bonds are issued by corporations, the federal government plus
many states, municipalities and governmental agencies.
Mutual Funds
A mutual fund is a pooled investment vehicle managed by an investment manager that
allows investors to have their money invested in stocks, bonds or other investment vehicles as
stated in the funds prospectus. Mutual funds are valued at the end of trading day and any
transactions to buy or sell shares are executed after the market close as well.
ETFs
ETFs or exchange-traded funds are like mutual funds in many respects, but are traded on
the stock exchange during the trading day just like shares of stock. Unlike mutual funds which are
valued at the end of each trading day, ETFs are valued constantly while the markets are open.
 Real Estate Investments
Real estate investments can be made by buying a commercial or residential property
directly. Real estate investment trusts (REITs) pool investors money and purchase properties.
REITS are traded like stocks. There are mutual funds and ETFs that invest in REITs as well.

Hedge Funds and Private Equity

Hedge funds and private equity also fall into the category of alternative investments,
although they are only open to those who meet the income and net worth requirements of being an
accredited investor. Hedge funds may invest almost anywhere and may hold up better than
conventional investment vehicles in turbulent markets.
Private equity allows companies to raise capital without going public. There are also
private real estate funds that offer shares to investors in a pool of properties. Often alternatives
have restrictions in terms of how often investors can have access to their money.

If I were to choose what form of investment I am going to invest in the future, it would be
an investment in real estate. Investment in real estate includes properties like building, industrial
land, plantations, farm houses, agricultural land near cities and flats or houses. I know that such
form of investment requires a huge amount of capital resources, but in no time those costs that
were incurred would be compensated as such investment is a profitable avenue today as prices of
real estate are increasing day by day, particularly land. The land is limited on Earth but the
population has been increasing. As the demand increases, but the supply of land is limited, the
prices tend to increase. Therefore, it is an attractive investment which generates higher return
during a short period of time.
Moreover, people nowadays tend to purchased condos or apartments for their convenience,
especially those salaried employees who work in urban cities. Residential units are also attractive
to foreigners who works and studies here in our country. If one owns a property, it acts as one
useful asset with saleable value. Furthermore, the property can also be used as security for raising
loans. Investment in real estate might be riskier as compared to investment in banks and mutual
funds, but it gives a reasonable return in investment.

3. What are the dangers of overdiversification in investment?

Diversification is important to any portfolio, but owning too many funds can make
investing more complicated. This could be too many investments of the same type or too many as
in the quantity of investments that are in the portfolio. This occurrence is referred to as
overdiversification which is a serious and common mistake that decreases investment returns
disproportionately to the benefits received.
 According to financial experts, a properly diversified portfolio contains 15 to 30 different
types of investments. Over-diversification occurs when the investment portfolio contains more
than 30 different types of investment vehicles.
Diversification creates the proper balance in the portfolio to reduce risk, while
overdiversification offsets the balance and increases the risk. Overdiversification can be more of a
problem than a help to the investor and the investment portfolio, because keeping track of all your
investments is not an easy task to do, and you have to review all of your monthly statements.
Overdiversification may also give an investor a false sense of security, putting him at risk
of taking a big loss. While proper diversification does not eliminate risk, overdiversification puts
the portfolio at a greater risk for losses, or rather, it prevents the investor from focusing on putting
together a properly diversified portfolio that has a higher potential to be profitable. So I think that
it would be best to handle fewer funds and accounts, which you can handle personally, and that a
proper research and investment objective should be conducted and followed to keep track of the
success or failure of your investment.
4. Enumerate some of the common investing mistakes. Explain each.

Trading too much and too often

When investing, patience is really a virtue. If you want good results perfect timing
is the key for it. That is why when investing, trading too much and too often is not a good
strategy if you want to gain high returns. It often takes time to gain the ultimate benefits of
an investment. Moreover, trading isnt free, there is always a cost involved, and so
frequently trading may lead to costs overrunning your expected investment return.

Not reviewing investments regularly

Nothing is constant in this world, only change itself. So, if you are investing in a
diversified portfolio, there is a chance that some things will go up, while others go down.
The well-planned portfolio that was built, if not being reviewed regularly, at least once a
year, might start to look different as what you have anticipated. Everything should be on
track, so that your investment will not be squandered and that your portfolio will not need
an adjustment or rebalancing.

Not having clear investment goals

There is an old adage that says, If you dont know where you are going, you will
probably end up somewhere else, this adage applies to investing as well. Starting from the
investment plan to the strategies used, the portfolio design, and even the individual
securities can be configured with the life objectives in mind. There are investors whose
plan is not well-organized, and they will just venture on what is the investment trend for
the time being. Some were focusing on maximizing short-term investment return, instead
 of designing an investment portfolio that will give them a high probability of achieving
their long-term investment goals. So, investors should not dwell on these so-called
temporary bliss that short-term investments could gain, instead they should gamble on
things that will benefit them for a long span of time.

Reacting to the media

The fast pace advancement of technology, brought about many useful things that
man could harness to improve our way of living. One of these advancements is the use of
media as a medium of information, freedom, and expression. Currently, there are a lot of
24-hour news channels that make money by showing tradable information to the public.
It is absurd to try to keep up with these inclinations. The thing is investors should examine
valuable information out of all the noise. Some successful investors have their own
intelligence to conduct research and analysis. Using the news as the only source of
investment analysis is a common investor mistake, because by the time the information has
become public, it has already been factored into market pricing.

Working with the wrong adviser

No man is an island. We depend on each other to live and accomplished our goals
in life. In investing, an investment adviser is your accomplice in achieving your investment
goals. The ideal financial professional and financial service provider not only has the
ability to solve your problems, but shares a similar philosophy about investing and even
life in general. Your adviser will serve as your guide on the path that you are taking. The
benefits of taking extra time to find the right adviser far outweigh the comfort of making a
quick decision.