Hello everyone!
We are living in trying times. Most countries of the world are currently experiencing economic doldrums which ultimately have adversely affected the citizenry. Desperate situations call for desperate measures.
Today I wish to share some thoughts on how to build an investment portfolio for purposes of dealing with risk and making positive return in a volatile economy.
Investment may be defined as the application of a capital sum in a venture now in expectation of some benefits to be received in the future, such as a regular income flow over a period of time and/or capital appreciation or both.
There are four qualities of an ideal investment:
Security of capital in respect of ease of withdrawal. An ideal investment is such that it is easy for the investor to get their money back at short notice.
Security of income in respect of the purchasing power. An ideal investment guarantees that the income is regular and will increase sufficiently in the future to counteract inflationary trends.
An ideal investment requires minimum inconvenience and expense in management.
Lastly, for an investment to be an ideal one, it will not require much inconveniences and expense in selling it. Put differently, its ownership can be easily transferred from one person to another.
Return on Investment
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The income generated or the capital gain achieved from an investment for purposes of analysis, may be measured by expressing the income or the gain as a percentage of the initial capital employed. It is customary for the investors to seek the highest rate of return on the capital they employed. They may accept a low yield because of the long term prospects of the investment. Return may therefore be seen as a measure of the success or otherwise of the investment. To a great extent, the yield reflects the investors views about the future risks attached to the investment.
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Risk
Risk from the point of view of investment may be defined as the probability that the actual outcomes will differ from the expected outcomes. Thus risk is different from uncertainty because the former can be calculated while the later cannot be calculated. A lot of factors give rise to risk encountered in investment. These factors are multi-faceted and multi-dimensional.
Portfolio
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Portfolio is a collection of investment assets or securities. In order to reduce or minimize the possibility of sustaining loss or reduced returns, a wise investor should not commit all their funds into one asset. Rather they should commit them into several assets which will altogether form their investment portfolio. The prudent selection of the best combination of securities/assets which an investor may invest in at a given point in time to ensure optimum return or maximization of the investors goal has been referred to as Portfolio Management. A good Portfolio Management serves as a means of minimizing risk. Diversification on the other hand refers to spreading out of the investments. The motives for Diversification include: Growth, Risk Spreading and Market Power.
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Risk in a Portfolio
The risk in a portfolio can be classified into two: Alpha Risk and the Beta Risk. Alpha Risk is that part of the total risk which is caused by controllable circumstances peculiar to a specific securities which can be eliminated by proper diversification. It is non-market imposed diversifiable risk. It is caused by circumstances such as quality of management, loss of key personnel and nature of the product. The Beta Risk on the other hand is that part of the total risk which is caused by uncontrollable circumstances such as inflation, economic and political problems, war etc.
