Chapter 12: Investment Strategy

What Is an Investment Strategy?

The term investment strategy refers to a set of principles designed to help an individual
investor achieve their financial and investment goals.

 This plan is what guides an investor's decisions based on goals, risk tolerance, and
future needs for capital.
 They can vary from conservative (where they follow a low-risk strategy where the
focus is on wealth protection) while others are highly aggressive (seeking rapid growth
by focusing on capital appreciation).

 Risk Tolerance is the degree of variability in investment returns that an

investor is willing to withstand in their financial planning.
 Variability is the extent to which data points in a statistical
distribution or data set diverge—vary—from the average value,
as well as the extent to which these data points differ from
each other. In financial terms, this is most often applied to the
variability of investment returns. 

 Capital appreciation is a rise in an investment's market price.

 The market price is the current price at which an asset or
service can be bought or sold.
Definition of Investing

What Is Investing?

Investing is the act of allocating resources, usually money, with the expectation of generating an
income or profit. You can invest in endeavors, such as using money to start a business, or in assets,
such as purchasing real estate in hopes of reselling it later at a higher price.

 In investing, risk and return are two sides of the same coin; low risk generally means low
expected returns, while higher returns are usually accompanied by higher risk.
 Risk and return expectations can vary widely within the same asset class; a blue-chip that
trades on the NYSE and a micro-cap that trades over-the-counter will have very different risk-
return profiles.
 The type of returns generated depends on the asset; many stocks pay quarterly dividends,
while bonds pay interest every quarter.
 Investors can take the do-it-yourself approach or employ the services of a professional money
manager.
 Whether buying a security qualifies as investing or speculation depends on three factors - the
amount of risk taken, the holding period, and the source of returns.

Need for Investing

Your investment enables you to be independent and not rely on the money of others in any event of
financial hardship. It ensures that you have enough money to pay for your needs and wants for the rest
of your life without having to rely on someone else or having to work in your old age.
Concepts of Compounding

What Is Compounding?

Compounding is the process in which an asset's earnings, from either capital gains or interest, are
reinvested to generate additional earnings over time.

 This growth, calculated using exponential functions, occurs because the investment will
generate earnings from both its initial principal and the accumulated earnings from preceding
periods.
 Compounding, therefore, differs from linear growth, where only the principal earns interest
each period.
 Compounding is the process whereby interest is credited to an existing principal amount as well
as to interest already paid.
 Compounding can thus be construed as interest on interest—the effect of which is to magnify
returns to interest over time, the so-called "miracle of compounding."
 When banks or financial institutions credit compound interest, they will use a compounding
period such as annual, monthly, or daily.

Understanding Compounding

Compounding typically refers to the increasing value of an asset due to the interest earned on both a
principal and accumulated interest. This phenomenon, which is a direct realization of the time value
of money (TMV) concept, is also known as compound interest.

Compound interest works on both assets and liabilities. While compounding boosts the value of an
asset more rapidly, it can also increase the amount of money owed on a loan, as interest accumulates
on the unpaid principal and previous interest charges.

 Time value of money means that a sum of money is worth more now than the
same sum of money in the future. This is because money can grow only through
investing. An investment delayed is an opportunity lost.
 Asset is a resource with economic value that an individual, corporation, or
country owns or controls with the expectation that it will provide a future
benefit.
 Liability is something a person or company owes, usually a sum of money.
Liabilities are settled over time through the transfer of economic benefits
including money, goods, or services. 

Tailoring Investment with Needs

Why is investment needed?

Investing is important, if not critical, to make your money work for you. You work hard for your money
and your money should work hard for you.

Investing is how you take charge of your financial security. It allows you to grow your wealth but also
generate an additional income stream if needed ahead of retirement.
Types of Investment

Stocks

A stock (also known as equity) is a security that represents the ownership of a fraction of a
corporation.

 An equity investment is money that is invested in a company by purchasing shares

of that company in the stock market
 This entitles the owner of the stock to a proportion of the corporation's assets and profits equal
to how much stock they own.
 Stocks are bought and sold predominantly on stock exchanges, though there can be private
sales as well, and are the foundation of many individual investors' portfolios.
 A stock is a form of security that indicates the holder has proportionate ownership in the
issuing corporation.
 Corporation’s issue (sell) stock to raise funds to operate their businesses. There are two main
types of stock: common and preferred.
 Stocks are bought and sold predominantly on stock exchanges, though there can be private
sales as well, and they are the foundation of nearly every portfolio.

Bonds

A bond is a fixed income instrument that represents a loan made by an investor to a borrower.
(Typically, corporate or governmental).

A bond is a written agreement or contract between an issuer and the holder that requires the issuer to
pay the holder the bond's par value or face value plus the stated amount of interest.

Instead of the typical lender-borrower set up where the borrower approaches the lender to ask for
some money, a bond will have the borrower (bond issuer) produce a contract (bond) that states the
terms of payments back to the lender (bondholder).

 A fixed-income security is an investment that provides a return in the form of

fixed periodic interest payments and the eventual return of principal at maturity.
 Fixed-Income security provides investors with a stream of fixed periodic interest
payments and the eventual return of principal upon its maturity.
 Bonds are units of corporate debt issued by companies and securitized as tradeable assets.
 A bond is referred to as a fixed-income instrument since bonds traditionally paid a fixed
interest rate (coupon) to debtholders. Variable or floating interest rates are also now quite
common.
 Bond prices are inversely correlated with interest rates: when rates go up, bond prices fall and
vice-versa.
 Bonds have maturity dates at which point the principal amount must be paid back in full or risk
default.
Types of Bonds offered in the Philippines:

 Maturity-based bonds

Bonds categorized based on the length of time it will mature.

 Treasury Bills (T-bills) – Bonds that mature in less than 1 year (short term). The
most common tenors (length of maturity) for T-bills are 91 days, 181 days, and 364
days.

Pros:
Matures in less than a year (shorter investment time frame)
Sold at a discount from their face value but the investor will get the full amount
upon maturity (works like a zero-coupon bond)

Cons:
Doesn’t pay income or coupon interest

 Treasury Bonds (T-bonds) – Bonds that have tenors of more than 1 year. The most
common maturity lengths for T-bonds are 2-year, 5-year, 7-year, 10-year, 20-year,
and 30-year bonds.
Pros:
Pays investor coupon interest (fixed income) at fixed intervals for the duration of
the bond

Cons:
Can present a higher risk due to the longer length of time before it matures

 Issuer-based bonds

These are bonds that are classified according to who issued it:

 Treasury Securities – Bonds issued by the Bureau of Treasury

Pros:

Low(er) risk since investment is backed by the full faith and credit of the
government (vs other fixed income investments)

Cons:

The lower risk comes with a lower yield potential compared to other fixed income
instruments

 Government Bonds – Bonds that are issued by various government agencies like
HDMF, Government National Mortgage Association (GNMA), Federal National
Mortgage Association, and others.

Pros:

Lower default risk (similar with Treasury Securities)

Favorable tax treatment

 Cons:

Interest rate risk. Gov’t bonds may lose value if market interest rates rise beyond
the bond’s face value

 Municipal Bonds – Bonds issued by the local government units (LGUs).

Pros:

Lower default risk

Low volatility

Cons:

Interest rate risk. Gov’t bonds may lose value if market interest rates rise beyond
the bond’s face value

 Corporate Bonds – Bonds issued by public and private companies.

Pros:

Potentially higher returns vs gov’t-issued banks

Highly liquid

Multiple options

Cons:

Higher risk compared to gov’t-issued bonds

Benefits of Investing in Bonds

 Provides better returns on your money compared to banks

 Serves as another investment tool for diversifying your investments
 Lets you preserve your capital and earn interest from it at the same time
 Generally viewed as safer than stocks as its less volatile in nature (especially short and
medium-length bonds)
 Bonds are tradeable (liquid)
 Bondholders receive some form of protection for their investment, when a company goes
bankrupt, the bondholders typically receive a portion (if not the face value) of their
investment
 There are different types of bonds that you can choose from

How Can You Make Money from Investing in Bonds?

 As an investor, the first step would be to buy bonds when the government or a private/public
company announces a bond offering.
 Details as to how you can purchase them may vary, the key is to position yourself for purchase
once announcements have been made.
Mutual Funds

A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors
to invest in securities like stocks, bonds, money market instruments, and other assets.

 A mutual fund is a type of investment vehicle consisting of a portfolio of stocks, bonds, or

other securities.
 Mutual funds give small or individual investors access to diversified, professionally managed
portfolios at a low price.
 Mutual funds are divided into several kinds of categories, representing the kinds of securities
they invest in, their investment objectives, and the type of returns they seek.
 Mutual funds charge annual fees (called expense ratios) and, in some cases, commissions,
which can affect their overall returns.
 The overwhelming majority of money in employer-sponsored retirement plans goes into mutual
funds.

Types of Mutual Funds:

 Money market funds

have relatively low risks. By law, they can invest only in certain high-quality, short-term investments
issued by U.S. corporations, and federal, state and local governments.

 Bond funds

have higher risks than money market funds because they typically aim to produce higher returns.
Because there are many different types of bonds, the risks and rewards of bond funds can vary
dramatically.

 Stock funds

invest in corporate stocks. Not all stock funds are the same. Some examples are:

 Growth funds focus on stocks that may not pay a regular dividend but have potential for
above-average financial gains.
 Income funds invest in stocks that pay regular dividends.
 Index funds track a particular market index such as the Standard & Poor’s 500 Index.
 Sector funds specialize in a particular industry segment.

 Target date Funds

hold a mix of stocks, bonds, and other investments. Over time, the mix gradually shifts according to
the fund’s strategy. Target date funds, sometimes known as lifecycle funds, are designed for
individuals with particular retirement dates in mind.

Bank Products

Bank Products means any service or facility extended to the Borrower or any Subsidiary by the Bank or
any Affiliate of the Bank

 Credit Cards
is a thin rectangular piece of plastic or metal issued by a bank or financial services company,
that allows cardholders to borrow funds with which to pay for goods and services with
merchants that accept cards for payment.
  Debit Cards

A debit card is a payment card that deducts money directly from a consumer’s checking account
when it is used.

 Purchase cards

A Purchasing Card (P-Card) is a type of Commercial Card that allows organizations to take
advantage of the existing credit card infrastructure to make electronic payments for a variety of
business expenses (e.g., goods and services).

 ACH transactions

Automated clearinghouse (ACH) payments are electronic payments that pull funds directly from
your checking account. Instead of writing out a paper check or initiating a debit or credit card
transaction, the money moves automatically.

 cash management, including controlled disbursement, accounts or services

Controlled disbursement is a common cash management technique that helps companies to monitor

and structure payments while benefiting as much as possible from earned interest.

 Hedging Agreements

means any interest rate, currency or commodity swap agreement, cap agreement or collar agreement,
and any other agreement or arrangement designed to protect a Person against fluctuations in interest
rates, currency exchange rates or commodity prices.

Hedging is an insurance-like investment that protects you from risks of any potential losses of your
finances. Hedging is similar to insurance as we take an insurance cover to protect ourselves from one
or the other loss. For example, if we have an asset and we would like to protect it from floods.

 Hedging is a risk management strategy employed to offset losses in investments by taking an

opposite position in a related asset.
 The reduction in risk provided by hedging also typically results in a reduction in potential
profits.
 Hedging strategies typically involve derivatives, such as options and futures contracts.

What Is Hedging?

The best way to understand hedging is to think of it as a form of insurance. When people decide to
hedge, they are insuring themselves against a negative event's impact on their finances. This doesn't
prevent all negative events from happening. However, if a negative event does happen and you're
properly hedged, the impact of the event is reduced.

 Options

Banks offer three main types of accounts:

 Checking

A checking account is a type of bank account that allows you to easily deposit and withdraw money for
daily transactions.

 Savings

Savings accounts have some limitations on how often you can withdraw funds, but generally offer
exceptional flexibility that’s ideal for building an emergency fund, saving for a short-term goal like
buying a car or going on vacation, or simply sweeping surplus cash you don’t need in your checking
account so it can earn more interest elsewhere.

 combination accounts.
combine accounts arises where a customer has multiple bank accounts, some of which are in
debit and some in credit.

Combination of accounts is arguably available in any situation where one party has multiple
accounts with another in one currency.

An account that offers the benefits of both savings and chequing accounts. You can write
cheques and be paid interest if you have sufficient money in the account.

 Chequing Account - A bank account that allows quick access to the money
in the account.
 Savings Account - A financial account that pays interest with low risk.

 Annuities

Annuities are contracts issued and distributed (or sold) by financial institutions where the funds are
invested with the goal of paying out a fixed income stream later on.

They are mainly used for retirement purposes and help individuals address the risk of outliving their
savings. Upon annuitization, the holding institution will issue a stream of payments at a later point in
time.

 Annuities are financial products that offer a guaranteed income stream, used primarily by
retirees.
 Annuities exist first in an accumulation phase, whereby investors fund the product with either
a lump-sum or periodic payments.
 Once the annuitization phase has been reached, the product begins paying out to the annuitant
for either a fixed period or for the annuitant's remaining lifetime.
 Annuities can be structured into different kinds of instruments—fixed, variable, immediate, and
deferred income—which gives investors flexibility.

Understanding Annuity

Annuities were designed to be a reliable means of securing steady cash flow for an individual during
their retirement years and to alleviate fears of longevity risk of outliving one's assets. Annuities can
also be created to turn a substantial lump sum into steady cash flow, such as for winners of large cash
settlements from a lawsuit or from winning the lottery.

 Retirement

Retirement refers to the time of life when one chooses to permanently leave the workforce behind.

 Traditionally, the retirement age was 65, and, most people live 15 to 20 years after turning 65
(on average).
 How much to save for retirement depends in part, on how long you'll expect to live in
retirement and how much annual income you'll need to live comfortably.
 When getting closer to retirement, investors should be doing several things, including
aggressively paying down debt, making maximum contributions to retirement accounts
 (including utilizing catch-up contributions), and assessing asset allocation for changing
investment time horizons and risk profile.

 Saving for Education

 savings plan designed to help pay for education. Originally limited to post-secondary education costs

Example:

Educational savings plan for college.

 Cryptocurrencies

A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly
impossible to counterfeit or double-spend.

 A cryptocurrency is a form of digital asset based on a network that is distributed across a large
number of computers. This decentralized structure allows them to exist outside the control of
governments and central authorities.
 The word “cryptocurrency” is derived from the encryption techniques which are used to secure
the network.
 Blockchains, which are organizational methods for ensuring the integrity of transactional data,
are an essential component of many cryptocurrencies.
 Many experts believe that blockchain and related technology will disrupt many industries,
including finance and law.
 Cryptocurrencies face criticism for a number of reasons, including their use for illegal
activities, exchange rate volatility, and vulnerabilities of the infrastructure underlying them.
However, they also have been praised for their portability, divisibility, inflation resistance, and
transparency.

Types of Cryptocurrencies

 Bitcoin
o Bitcoin is the oldest and most popular cryptocurrency in the world. It was created in
2009. It is the first decentralised cryptocurrency that facilitated transactions using its
own blockchain technology. At the time of writing, Bitcoin was priced at roughly ₹
37.34 lakhs.

 Ethereum
o Ethereum is a cryptocurrency network that uses blockchain technology to facilitate
smart contracts. It is a decentralised software that allows smart contracts to be built
on its network and run on it without any control or fear of fraud by a third party. Ether
is the token used to enable transactions on the Ethereum network. Ethereum is
currently priced at roughly ₹ 2.46 lakhs.

 Dogecoin
o This cryptocurrency was created using a popular meme that features a Shiba Inu dog as
its icon. The meme was immensely popular as is the cryptocurrency whose price
skyrocketed after receiving backing from Tesla CEO Elon Musk. Musk managed to shake
up the already volatile crypto market by backing the meme coin. Dogecoin, unlike
Bitcoin, has no limit on the number of coins that can be mined. It's is currently priced
at ₹ 22.49.
  Cardano
o Cardano was created through a research-based approach by a team of mathematicians,
engineers, and cryptographers. In the ecosystem of cryptocurrencies, Cardano claims
to be a more sustainable and balanced coin when compared to the other
cryptocurrencies. It is currently priced at ₹ 210.78.

 Litecoin (LTC)
o It was created in 2011 by Charlie Lee, a graduate from MIT and an engineer at Google.
It was one of the first few cryptocurrencies that followed the same technology as
Bitcoin. Despite being modeled on Bitcoin, Litecoin generates blocks at a faster rate,
and, hence, offers a faster transaction time. It is currently priced at ₹ 13,631.

 Commodity Futures

A commodity futures contract is an agreement to buy or sell a particular commodity at a future date.

 The price and the amount of the commodity are fixed at the time of the agreement.
 Most contracts contemplate that the agreement will be fulfilled by actual delivery of the
commodity.
 A commodity is a basic good used in commerce that is
interchangeable with other goods of the same type
 Commodities are most often used as inputs in the production
of other goods or services.

How a Commodity Futures Contract Works

Most commodity futures contracts are closed out or netted at their expiration date. The price
difference between the original trade and the closing trade is cash-settled. Commodity futures are
typically used to take a position in an underlying asset.

Typical assets include:

 Crude oil
 Wheat
 Corn
 Gold
 Silver
 Natural gas

Commodity futures contracts are called by the name of their expiration month, meaning a contract
ending in September is a September futures contract. Some commodities can have a significant amount
of price volatility or price fluctuations. As a result, there's the potential for large gains but large losses
as well.

Risks of Commodity Speculating

Unlike options, futures are the obligation of the purchase or sale of the underlying asset. As a result,
failure to close an existing position could result in an inexperienced investor taking delivery of a large
number of unwanted commodities.
  Security Futures

A security futures contract is a legally binding agreement between two parties to purchase or sell in
the future a specific quantity of shares of a single equity security or narrow-based securi- ties index, at
a certain price.

Example:

Common stock or an exchange-traded fund or a narrow-based security index at a specified price, on a

specified date in the future (known as the settlement or expiration date). 

 Insurance

Insurance is a contract, represented by a policy, in which an individual or entity receives financial

protection or reimbursement against losses from an insurance company.

 Insurance is a contract (policy) in which an insurer indemnifies another against losses from
specific contingencies or perils.
 There many types of insurance policies. Life, health, homeowners, and auto are the most
common forms of insurance.
 The core components that make up most insurance policies are the deductible, policy limit,
and premium.

Examples of Insurance Policies in the Philippines:

Life Insurance

Life insurance is a contract between an insurer and a policy owner. A life insurance policy guarantees
the insurer pays a sum of money to named beneficiaries when the insured dies in exchange for the
premiums paid by the policyholder during their lifetime.

 Life insurance is a legally binding contract that pays a death benefit to the policy
owner when the insured dies.
 For a life insurance policy to remain in force, the policyholder must pay a single
premium up front or pay regular premiums over time.
 When the insured dies, the policy’s named beneficiaries will receive the policy’s face
value, or death benefit.
 Term life insurance policies expire after a certain number of years. Permanent life
insurance policies remain active until the insured dies, stops paying premiums, or
surrenders the policy.
 A life insurance policy is only as good as the financial strength of the company that
issues it. State guaranty funds may pay claims if the issuer can’t.

Term Life insurance.

Term life insurance, also known as pure life insurance, is a type of life insurance that guarantees
payment of a stated death benefit if the covered person dies during a specified term.

 Once the term expires, the policyholder can either renew it for another term, convert
the policy to permanent coverage, or allow the term life insurance policy to terminate.
 Term life insurance guarantees payment of a stated death benefit to the insured's
beneficiaries if the insured person dies during a specified term.
 These policies have no value other than the guaranteed death benefit and feature no
savings component as found in a whole life insurance product.1
  Term life premiums are based on a person’s age, health, and life expectancy.
 Depending on the insurance company, it may be possible to turn term life into whole
life insurance.
 You can often purchase term life policies that last 10, 15, or 20 years.

Whole Life Insurance.

Whole life insurance provides permanent death benefit coverage for the life of the insured.

 Whole life insurance lasts for a policyholder’s lifetime, as opposed to term life
insurance, which is for a specific amount of years.
 Whole life insurance is paid out to a beneficiary or beneficiaries upon the
policyholder’s death, provided that the premium payments were maintained.
 Whole life insurance pays a death benefit, but also has a savings component in which
cash can build up.
 The savings component can be invested; additionally, the policyholder can access the
cash while alive, by either withdrawing or borrowing against it, when needed.

Universal Life Insurance

Universal life (UL) insurance is permanent life insurance with an investment savings element and low
premiums that are similar to those of term life insurance.

 Universal life (UL) insurance is a form of permanent life insurance with an investment
savings element plus low premiums.
 The price tag on universal life (UL) insurance is the minimum amount of a premium
payment required to keep the policy.
 Beneficiaries only receive the death benefit.
 Unlike term life insurance, a UL insurance policy can accumulate cash value.

Variable Life Insurance.

A variable life insurance policy is a contract between you and an insurance company. It is intended to
meet certain insurance needs, investment goals, and tax planning objectives.

 It is a policy that pays a specified amount to your family or others (your beneficiaries)
upon your death.
 It also has a cash value that varies according to the amount of premiums you pay, the
policy’s fees and expenses, and the performance of a menu of investment options—
typically mutual funds—offered under the policy.

Health Insurance

Health insurance is a contract that requires an insurer to pay some or all of a person's healthcare costs
in exchange for a premium

Educational Insurance

An educational plan is a savings, insurance, and investment plan that helps parents save funds for their
child's college education.
Vehicle and Accident Insurance

a contract between you and the insurance company that protects you against financial loss in the event
of an accident or theft

EQUITY FEEDER FUND

A feeder fund is one of several sub-funds that put all of their investment capital into an overarching
umbrella fund, known as a master fund, for which a single investment advisor handles all portfolio
investments and trading.

Sources/References

https://www.investopedia.com/

https://grit.ph/

https://www.rbf.gov

https://dividendearner.com

https://www.finra.org/

https://grit.ph/

https://www.wallstreetmojo.com/

https://www.cnbc.com/

https://www.ndtv.com/

https://www.cftc.gov/

https://www.nfa.futures.org/

Prepared by:

Lesley Allen D. Kabigting, MBA

College of Business Administration
Guagua National Colleges