Investing is an advanced functional approach to money. The possibility of financial investment fundamentally revolutionized the basic model of generating income - in order to earn more, you need more and better work. Increasing finances is also facilitated by their competent redistribution and long-term investment.
In the financial market distinguish between investing direct or portfolio. Direct implies participation in the statutory capital of an enterprise with the aim of generating increased income in the future. Most often, direct investors are: management apparatus, proxies led by the founder. When the company begins to generate income, it is distributed among direct investors in proportion to the contribution of each.
Portfolio investment involves the purchase of securities. Each has a certain initial cost and investment attractiveness and begins to generate income for the owner according to a pre-developed schedule for receiving dividends.
Portfolio investing is considered a more advanced and safer way of long-term investment, so it needs to be considered in more detail.
What is a securities portfolio? Concept, formation, portfolio investment management methods
The securities portfolio provides such investment characteristics that it is impossible to achieve from the position of holding a single security.
In essence, a portfolio is capital invested in assets, which should be profitable but have potential risks. With insufficient or irrational management, the percentage of income decreases, and the likelihood of risks and large financial losses increases.
A portfolio of securities can be managed directly by its owner or entrusted with the management of an expert stock market intermediary. This is a common practice, often specialists in the consulting and financial environment organize entire investment funds, trusts and hedge funds, and ordinary entrepreneurs who are just looking at investing cannot adequately assess the risks and bonuses of portfolio investment, as they’re not the boiler. "
In the matter of choosing a stock intermediary, the key role is played by the authority of the stock agency, the size of the commission for services and the credibility of a particular consultant.
Portfolio management: concept, strategies, risks
The investment portfolio management process can be described as the sum of the owner’s investment resources, analysis and forecasting tools, and also strategies for responding to changes in the stock market.
Today, it is common practice in European countries to donate at a wedding or childbirth not toys, equipment, cash, but securities. In a relatively stable economy, an investment package is considered the most reliable way to ensure regular passive income in the future.
The most popular way to mitigate risks without resorting to second-level investments or hedging is competent diversification. Diversification - investing in various assets. This approach is based on the fact that the management of a package of securities can begin with the correct distribution of investments in various fields and industries. The market for all goods and services cannot collapse at the same time. This diversified distribution of stocks helps ensure portfolio returns in any unpredictable market situation.
Definition of investment goals
This is the first stage of portfolio management, it precedes the purchase of stocks, options, bonds. Investment objectives correlate with determining the importance of each portfolio management criterion. The main criteria for portfolio management are considered profitability, liquidity and risk.
Profitability and investment safety are the main key goals of managing a portfolio of securities. But the proportion of security and profitability often redistributes the underlying goals of investing and the category of investor.
Most often, the achievement of the “invulnerability” of the invested capital is ensured by the purchase of investments with a low profit.
The expected return on a portfolio is calculated based on the return on all of its assets.
The liquidity of the investment portfolio is also important. It is determined by how quickly, if necessary, it is possible to turn securities into real money, whether it is possible to take back its statutory share or to resell securities.
Securities that can be converted into cash equivalents for a period of up to two weeks are considered highly liquid. Sometimes for low-liquid securities (with a liquidity term of more than six months) the highest rate of income, or “liquidity premium”, is calculated. This means the following: for an investment that cannot be taken back, the highest percentage of income is calculated.
Formation of an investment portfolio
After setting investment objectives, you can begin the formation and management of a portfolio of securities.
The securities portfolio can be combined with assets from different industries in different proportions:
- Newcomers to investing often form a purely conservative shareholding, which almost 100% guarantees the preservation of capital, but does not provide tangible profits. These are mainly government bonds or “blue chips” of large corporations. The latter are shares of reliable, highly liquid companies with a high reputation and a stable dividend payment schedule. The term migrated to the stock environment from a casino, where blue chips have the highest value in the game.
- A more risky, but also profitable version of the portfolio is a balanced one from highly liquid reliable shares and second-tier securities.
- The third option is most suitable for short-term investments, it involves the purchase of rather risky securities, but with the probability of gigantic returns. Such a portfolio, in addition to classic stocks and bonds, often includes options and default swaps.
Portfolio Strategies
In the stock market use the expression: “Investments are when money does not work, but fights, and it is the securities portfolio management strategy that decides whether to return the money with victory or die forever.”
Many people underestimate the fundamental importance of competent investment portfolio management. But it is important to understand that investing is not a lottery or a game of chance. Very rarely, risky investments actually bring real superprofits. But history knows such lucky accidents: as an optimal example, we can recall the cult movie hero Forest Gump and his, together with the captain, investment in the Apple Company. But in the real financial world, the reliability of investments most often clearly correlates with their low payback and vice versa.
Distinguish between active and passive strategies. There is still a list of alternative strategies, but they can be assigned to one of these main categories.
Active strategy - The best management option in a dynamic, sometimes unstable market. Most often, active management is the prerogative of stock intermediaries or investors themselves, who are able to clearly analyze the index data of rating agencies and carry out operational resale or purchase of securities.
Passive style management is permissible in more or less constant market segments.The basic principle of a passive strategy is to buy and hold. The investment horizon of passive investors does not include SWAP analyzes or includes them only at the time of purchase, does not imply the purchase of additional financial instruments.
The main forms of active portfolio management
The basis of active management is its frequent revision, the rejection of shares that no longer meet the stated payback requirements. The key to quality active management is the ability to accurately predict the likelihood of changes in the stock market and the prices of financial instruments. If the participants in active strategies are most often banks, investment funds, stock brokers and other “big fish” of the stock market, they often resort to prognostic, partisan, and sometimes manipulative methods.
Often, active portfolio management involves the use of the “swap” method. A swap is a transaction that includes a cash purchase and sale of assets with the simultaneous conclusion of counter-operations on a certain line. This is a multi-tool method. There are both currency and gold swaps. But this does not negate the fact that, thanks to swapping, multi-million frauds became possible, which, however, were carried out within the framework of the law. Consider the active management of a securities portfolio using an example. The manager has, say, a 40% stake in the small industrial company Shurupchik. He plans to abandon them. He can resell them or take away his part of the capital. He calculates the risks that can create for the “Screwdriver”, taking his share of the capital. Suppose he predicts a fall in the value of the remaining shares of the firm by more than 8%. Before giving up the shares, the manager sends the agent to some bank to buy swaps for a certain amount with the expectation that the next six months the shares of Shurupchik will fall by less than 5%.
If we talk about managing the portfolio of securities of the bank, then we can talk only about an active strategy. Firstly, the banking sector itself implies the participation of all its dealers in active financial activities. The investment policy of great banks is based on increasing profits and eliminating risks.
A common security in the banking sector is a bond. This is a kind of bank bond. The bank issues bonds, customers buy them up and expect to repay their value with interest at the indicated time. The bank may insure itself against financial losses in the insurance company, but this implies monthly insurance payments, that is, additional financial losses. Also - with the heyday of the lending market, with the growing risk of unpaid loans - managing the bank's portfolio of securities includes more and more instruments to hedge unwanted risks.
Here synthetic CDO bonds, or second-level bonds, enter the arena. That is paper on probability. The bank is also issuing a bundle of bonds that are being sold between second-tier investors. Synthetic bond holders receive periodic payments from the bank or other owner of credit protection for agreeing to assume the credit risk of the bank.
In 2000, the synthetic bond market inflated to the point where banks issued fifth-level bonds.
The main forms of passive portfolio management
Passive management style is applicable only in markets with a level of reliability above the average and in markets where assets have a high degree of efficiency. High efficiency of assets means that they quickly and clearly respond to the usual changes in the market environment, and the investor himself can figure out these changes without the help of financial intermediaries.
A passive investor cannot rely on double superprofits, but with a correct analysis of the assets purchased, one can expect a fair return on equity. Although passive models of managing a securities portfolio do not imply high incomes, they also do not incur additional losses: commissions to intermediaries, expenses for notaries, representatives, transportation costs, which is unavoidable with active strategies.
In long-term investments, a passive management method is very advisable. Methods for managing a portfolio of securities as part of a passive strategy often include indexing. This is one of the most competent passive management tools. As you know, the investment market is not a secret door; transparency of information is ensured at the proper level. Indexing is a kind of reflection of the securities market. Based on an analysis of the data of rating agencies, an investor compiles a portfolio of shares of companies that have a flat index. This simple strategy is called "buying a market"
Most often, passive strategies are chosen by small companies or individuals to accumulate and increase their savings.
Assessment of the relationship between profitability and investment risk
The profitability of an investment portfolio depends on the securities included in it and the share of each in the portfolio structure. In essence, portfolio return and risk is the arithmetic average of the return and risk of its constituent securities.
Risk is the definition of any kind of deviation from the expected event. The indicators that are the main risk measures are standard deviation and variance. The first is also called "volatility." The measure of risk can be determined on the basis of data on previous investment returns. If the issue of investing in the assets of a freshly created enterprise is considered (when there is no data on previous periods of profitability), then the risks of such securities are almost impossible to determine.
But the competent risk management of a securities portfolio begins with their diversification. If the risk is still high, you can spend some of the money on hedging or insurance.
Portfolio Formation Models
Markowitz Model focused on acquiring higher rates of return. The main method of countering risks within the framework of this model is the principle of diversification, that is, the distribution of investments in various fields.
Portfolio management for Harry Markowitz is based on the analysis of variants of random variables and expected averages. This model was invented half a century ago, but is still relevant. Its drawback is that for making calculations according to the model a lot of relevant and reliable information is needed.
CAPM Model owned by American economist James Tobin. His portfolio management model focuses more on the market structure than on the portfolio structure. Tobin allows the use without risky, short-term assets, even synthetic options. But their model author recommends combining it with long-term, reliable securities, such as bonds or blue chips. Risk calculations Tobin advises to carry out only on short-term investments with doubtful reliability.
Also applies index Sharpe model. The principles of managing a portfolio of securities behind the Sharpe model are considered under a slightly different key. The model is also from America, is considered the newest. Today, the largest banks and stock companies use this model in assessing the effectiveness of their investment portfolio. If before Sharpe, investment management specialists tried to complicate the models, then Sharpe dared to simplify the calculations as much as possible, without neglecting the accuracy of the forecasts.He suggested using the index method of regression analysis to reduce the complexity of the portfolio analysis process.
The practice of trust management of investments in the USA and in Russia
Trust portfolio management involves participating in the process of selecting, purchasing and managing securities of a qualified financial intermediary.
Trust funds, investment funds, stock brokers, etc. conduct large-scale research of the stock market, develop skills for years to predict trends in the growth or decline of its individual segments, hone professional intuition, so that they can best implement the right methods for managing a portfolio of securities.
In addition to individuals, the assistance of intermediaries in investing is also ordered by large companies, which also have their own financial specialists, but for a competent investment they prefer to get help from a person from the expert environment.
In the countries of the Anglo-American economic and legal system, the main form of mediation between investors and clients is trusts (from the English. Trust - trust). In America, trust activities, in addition to funds, are also carried out by large banks.
In our country, trust management of the client’s securities portfolio is also carried out by some banks that are licensed by the Bank of Russia. Trust management is legally regulated by the Law on the Securities Market and Chapter 53 of the State Code of the Russian Federation.
Securities portfolio management strategies involve investing at the highest level. Portfolio management as a category appeared almost simultaneously with the emergence of investment. Over the hundreds of years of the existence of investment management, several dozen strategies, models and management principles have emerged. The development of corporate, public and private investment would not be so rapid without the right management technologies.