LEARNING MODULE #1

INVESTMENT AND PORTFOLIO MANAGEMENT

Learning Objectives:
a. Define investment management, investment, compounded growth, risk tolerance,
investment portfolio, and financial markets.
b. State how investment can offset the effect of inflation.
c. Enumerate the following:
1. Different form of investment
2. Factors to be considered in allocating investable funds
3. Common investing mistakes

Chapter 1- Introduction
Any person or organization looks forward to a better future in terms of income and
available resources despite the onslaught of inflation. These can be realized by making
investments.

Investment Management Defined

Investment management refers to the process of defining investment objectives,
adopting and executing strategies to optimize results considering the risk involved, and
evaluating performance periodically.

Personal Goal in Investing. When talking about investment, it is not necessarily a matter of
continuously accumulating wealth or being materialistic. Rather, it should be looked upon as a
means of reducing future financial worries and ultimately, in providing financial and personal
independence. With successful investment management, one can look forward to engaging
activities he is most interested in and having complete control over how he spends his time. In
reverse case, one who fails to invest may find himself forced to work primarily for financial
compensation even in his old age.

Investment defined
Investment refers to assets acquired to realize income and/or earn profit. They are
expected to increase one’s equity or reduce future financial worries. Investing requires
sacrificing some of current pleasures with the hope and expectation that resources acquired
will enhance the future. Example: a family that dines out every week decides to do so only
twice a month instead so that the amount saved can be set aside and accumulated in a bank
account. Later on, part of it can be transferred to other forms of investment.

Investment Portfolio
The word portfolio refers to the brief case that is used in carrying business papers and
documents. Thus, the portfolio (or investment portfolio) of an entity or individual may consist
of bank accounts, treasury bills, bonds, commercial papers, precious metals and stones, stocks
and real estate.
Investments as Hedge Against inflation
Investments are made to protect one’s financial resources from the corroding effect of
inflation. The purchasing power of peso is inversely affected by the constant rise in prices so
that what one peso can buy now cannot be bought with the same amount three to five years
from now.

Investable Cash
Investable cash refers to 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 operations. It may come from excessive cash in flow from operations, extra
ordinary gains and disposal of idle assets.

Liquidity Buffer
Liquidity buffer refers to the amount of cash that an entity or individual must have to
take care of unexpected cash requirements. It may be in savings accounts, time deposits and
special savings account.

Forms of Investment
1. Savings Account – this is lending to the bank cash deposits that can be withdrawn
anytime.
2. Time Deposit – this is lending to the bank for a fixed length of period. It earns
interest higher than the savings accounts do.
3. Special savings Deposit (Premium Savings Account) – this earns a rate higher than
that on the ordinary time deposit.
4. Trust Investments – these are pooling of investors money as evidenced by
certificates issued by the trustee banks who are authorized to invest the money.
5. Treasury bills (T-bills) – these are short-term promissory notes issued by the national
government.
6. Commercial Papers – these are interest bearing promissory notes issued by big firms
and are considered a low-risk form of marketable securities. Most of these are asset-
backed securities.
7. Mutual Funds – these are a pooling of investors’ money by a stock corporation that
issues redeemable shares of stock.
8. Bonds – these are interest bearing certificates of indebtedness issued by an
organization.
9. Shares of Stocks – these are shares in the ownership of corporate entities and are
evidenced by stock certificates.
10. Derivatives – these are financial instruments the value of which is derived from the
value of other assets. Examples are options and future contracts.
Option refers to the right but not the obligation to buy or sell something at a
specified price and at a specified date or period of time.
Future contracts are forward type contracts wherein buyer and seller are committed
to trade a given asset at a set price on a fixed date. They are often referred to as
futures.
 11. Real Estate – this refers to real property (land and buildings)
12. Precious Stones and Metals – precious stones generally refers to diamonds, because
they appreciate in value due to their rarity. Precious metals are platinum, gold and
silver.
13. Other forms of investment – other forms of investment may be works of art and
other collectibles.

Credit Ratings
A credit rating is an opinion on the financial soundness of an enterprise and its capability
to pays its debts and the corresponding interest.

Risk and Risk Tolerance

Investment involves varying degree of risk or uncertainty. Risk may refer to non-
realization of expected earnings or loss of capital. Generally, the greater is the degree of risk,
the greater is the opportunity for profit. Thus, investments are considered as a trade-off
between safety and profit. Consequently, one’s choice of investments depends on the degree
of risk he can be comfortable with or his risk tolerance. For a person, this would refer to the
degree of risk that he can afford to be exposed to and still sleep soundly.

Diversification in Investments

Diversifications as applied to investments refer to spreading investable funds to different

investment items. As much as possible, one’s investments should be a mix of different types of assets.
This is observed in order to benefit from the advantages that each of them brings about, to avoid putting
one’s money in “one basket” and consequently minimize risk from over-exposure to only one kind of
asset. Example: a corporation’s investments may be in time deposits, treasury bills, bonds and stocks.

Over diversification this would be going to the extreme of spreading the investable funds to so
many items of investment, it may bring forth the following disadvantages:

a. Inability of investor to keep track of developments in each item of investment

b. Increased transaction costs
c. Minimized earnings from the more profitable items of investment.

Laddered investing – this refers to timing investment maturities at staggered dates to jibe with
expected or planned cash outlays.
Market Timing – this refers to buying and selling items of investment when it is advisable to do
so. In other words, get in and out of the market at the most opportune time.

Offensive and Defensive investments

Offensive investment is aggressive for it entails more risks but bigger rewards. Stock investment
is an example.
 In the case of defensive investment, it entails less risks but smaller rewards. In most cases, it
brings in fixed amount of income or gain upon sale can be predetermined. Examples are time deposits,
jewelry and real estate.

Investment mix – this refers to how investable funds are allocated between the different
investment items. The following are examples

Company A Company B
Bank Accounts 10 20
Trust investment 30 20
Jewelry 10 10
Stocks 20 30
Real estate 30 20
Total 100 100

Portfolio Manager
Portfolio manager is the person or office given the authority to make decisions regarding the
investments of an individual or entity. In some cases, the investor himself opts to manage his
investments. In cases where in the investor does not have the time or the capability to do so, a
professional manager is hired.

Financial Markets
Financial markets are the venues for buying and selling financial instruments. They are usually
classified into money markets and capital markets. Money market instrument are those that are often
referred to as near-cash items and include short term, marketable, low-risk debt securities such as
commercial papers and treasury bills. For capital market, the financial instruments dealt with are the
longer and riskier securities such as bonds, stocks and derivatives.

Common Investing Mistakes

a. Failure to make financial plan for the future- this refers to failing to understand one’s overall
financial situation and how wise investments fit in. financial goals should be set considering
one’s tax situation, debt obligations, retirement provisions and insurance coverage.
b. Miscalculating risk tolerance- risk tolerance varies depending on one’s source of income,
personality, lifestyle, financial goals and investment time frame. Oftentimes, risk is avoided
by putting all funds in savings accounts and time deposits.
c. Failing to keep sufficient contingency funds – this refers to the failure to set aside sufficient
amount of money for emergency needs so that an investor is apt to sell a long-term
investment when prices are down. There should be sufficient savings to serve as a buffer in
case requirements for cash exceed earnings.
d. Jumping on the bandwagon – in a layman’s language, this refers to joining the crowd to
wherever it goes. In investments, it is buying when everybody is buying and selling when
everybody is doing so. This often results in high acquisition cost and low selling price.
e. Inability to have leverage – this refers to putting too many eggs in one basket or maintaining
only one form of investment so that the investor is apt to suffer significant loss if something
goes wrong with it.
f. Over-diversification – this refers to spreading investable funds to so many items of
investment resulting in minimum gains because the investor is unable to keep track of
developments that affect each of them and to earn more on the more profitable investment
items.
g. Erroneous timing of the market- this refers to buying when it is time to sell and selling when
it is time to buy. Oftentimes, investors are tempted to buy when prices are high and to sell
during bleak times or prices is low.
h. Failure to keep a long term perspective- this refers to the failure to look forward to a
number of years in the future by merely buying and selling at small margins.
i. Inability to cut losses- this refers to the inability to sell at a loss when prices are going down.
In some cases, investors are hesitant to recognize losses so that capital remains idle for so
many years thereby depriving themselves of the chance to earn profit in other forms of
investment.