Week 5 FINAL DUE APR 8th.
11
Investment Portfolio
Kevin Sessions
University of Arizona Global Campus
BUS 405 Principles of Investments
Mark Stricklett
April 2, 2023
Investment Portfolio
Financial Situation and Goals
1. Developing a diverse investment portfolio with an average 8% yearly return over the following ten years.
Creating a diverse investment portfolio is excellent for long-term financial stability and growth. A diversified portfolio will include a variety of investments, including stocks, bonds, and alternative investments like REITs and ETFs. It spreads risk and lessens the overall portfolio's exposure to market volatility. It will track the improvement using a variety of performance-tracking techniques and software. These tools will make it easier to monitor the overall success of the portfolio and the performance of the individual items in it. I can assess whether the investment performance is at or above this rate by setting an annual target return of 8%. Building a diversified investment portfolio with an average yearly return of 8% over the next ten years is feasible given the high-income potential and secure employment condition. I must remember that investing entails risk, and sometimes the investments do not perform as well as I had hoped. To improve the chances of success, I must do extensive research, diversify the investments, and adopt sound risk management techniques. An average annual return of 8% is realistic, aligning with historical market averages. However, it is essential to note that investments can experience volatility in the short term, which may affect the returns. I should consider diversifying the portfolio and investing in different asset classes to manage risk. The goal is time-bound, with a specific timeline of 10 years. By setting a specific timeframe, I can establish a sense of urgency and work towards achieving the goal within a defined period.
2. Pay my mortgage in 15 years by making extra principal payments.
Paying off my mortgage is a significant financial goal that can provide financial security and peace of mind. Making extra principal payments is a practical way to achieve this goal. By paying down the principal faster, I can reduce the total amount of interest I pay over the life of the mortgage and shorten the repayment period. To measure the progress towards this goal, I should be able to track the reduction in the total amount owed over time. I can also calculate the additional amount needed to pay the mortgage faster and track the progress toward achieving this target. With the high-income potential and stable work situation, making extra principal payments on a mortgage is an attainable goal. However, I should consider other financial priorities, such as building an emergency fund and retirement savings, before allocating extra funds toward mortgage payments. Paying off a mortgage in 15 years is a common financial objective; making extra principal payments is a practical way to achieve this. However, ensuring that the extra principal payments do not strain the overall financial situation is essential. Therefore, I should work with a financial advisor to determine the number of extra payments I can afford. The goal is time-bound, with a specific timeline of 15 years. By setting a specific timeframe, I can establish a sense of urgency and work towards achieving the goal within a defined period.
Investment Types and Rationale
Real Estate:
Investing in real estate can be a great way to build wealth over the long term. One of the key benefits of real estate is that it provides both rental income and potential appreciation in value. Rental income can provide a steady stream of cash flow, while appreciation in value can lead to long-term capital gains. When investing in rental properties, it is crucial to consider location, property condition, and tenant demographics. Properties in desirable locations have higher rental demand and appreciation potential. Properties in good condition tend to attract better tenants and require less maintenance. Understanding tenant demographics can help investors target the right renters and minimize vacancies. Real estate investment trusts (REITs) are an excellent way to invest in real estate without the hassle of managing rental properties. REITs own and operate income-producing properties such as apartment buildings, office buildings, and shopping centers. REITs typically pay high dividends and can provide a steady income stream to investors. Real estate crowdfunding platforms allow individual investors to invest in commercial and residential real estate projects alongside other investors. These platforms typically require lower minimum investments than traditional real estate investments and offer the potential for high returns. However, they also carry a higher level of risk than more traditional real estate investments.
Exchange-Traded Funds (ETFs):
ETFs are an investment fund that trades like stocks on an exchange. Following a specific index, industry, or asset class exposes a comprehensive portfolio of stocks, bonds, or other assets. ETFs' low costs are among their most significant benefits. ETFs are more economical than mutual funds since they often have lower management expenses. ETFs also offer diversification, which can reduce the risk of a portfolio. Investing in a broad-based ETF can gain exposure to various stocks, bonds, and other assets. ETFs may also be more adaptable than mutual funds. ETFs are a popular choice for day traders since they, like stocks, can be bought and sold at any time throughout the trading day. ETFs are also tax-efficient since they allow investors to defer paying capital gains taxes by holding them for a considerable time.
Stocks:
Acquiring shares of specific organizations in the anticipation that their value would rise over time is the process of investing in stocks. In the near term, stocks can be risky and volatile but offer long-term gain potential. Researching the businesses and markets of interest is crucial when investing in stocks, as is diversifying the holdings across various industries and asset classes. Value, growth, and dividend investing are well-liked stock investment techniques. In value investing, stocks undervalued by the market are sought after using metrics like price-to-earnings ratios or book values. The goal of growth investing is to find businesses that are predicted to grow more quickly than the overall market. Finding firms that pay significant dividends and have a track record of raising those payments over time is critical to dividend investing. Individual stocks, mutual funds, or exchange-traded funds can all be used to invest in equities. It is crucial to remember that past performance does not guarantee future outcomes and that investing is always risky. Reinvesting the dividends can prove beneficial in the long run. According to Smart, S., & Zutter, C. J. (2020). “For investors who plan to reinvest any dividends that they receive, a dividend reinvestment plan (DRIP) may be attractive. In these corporate-sponsored programs, shareholders can have their cash dividends automatically reinvested into additional shares of the company’s common stock. (Similar reinvestment programs are offered by mutual funds and by some brokerage houses, such as Bank of America and Fidelity.) As Table 6.2 demonstrates, reinvesting dividends can have a tremendous impact on an investment’s value over time." While investing in stocks is crucial to maintain a long-term outlook because stock values frequently experience short-term changes.
Rationale
The choice of these three investment types supports my diversification strategy by providing exposure to various asset classes, including real estate, stocks, and bonds (through ETFs). It helps reduce the portfolio's risk and provides potential for long-term growth and income generation. Additionally, each investment type aligns with the SMART goals of achieving long-term wealth building and passive income generation while being cost-effective and well-diversified.
Real estate aligns with goals of long-term wealth building and passive income generation. Investing in rental properties or REITs can provide both rental income and potential appreciation in value, which can help achieve financial goals over time. Real estate also provides a good hedge against inflation, as rental income tends to increase over time with inflation.
ETFs align with the goal of diversification and cost-effectiveness. By investing in a broad-based ETF that tracks a specific index, sector, or asset class, I can gain exposure to a diversified portfolio of stocks, bonds, or other assets. It can reduce risk in the portfolio and provide long-term growth potential. Additionally, ETFs tend to have lower management fees than mutual funds, making them more cost-effective.
Stocks are long-term investments whose growth potential and ability to deliver high returns make them more attractive to any investor. Their high rates of return and long-term investment potential make them highly attractive to me and align with my investment objective. Investing in individual stocks or mutual funds/ETFs can generate more significant long-term returns than investing in other assets such as bonds or savings accounts.
Investment Allocation
Real estate: $30,000 or 30% of the portfolio; Real estate investment can generate passive income and value appreciation over time. However, investing in a rental property demands high investment costs, time, and work. Thus, investing in a REIT (real estate investment trust) may be a more convenient alternative. REITs are publicly traded organizations that own and manage a portfolio of real estate holdings, including office buildings, residences, and retail malls. By investing in a REIT, investors can receive exposure to the real estate market without worrying about property management. The $30,000 allotment might be distributed across residential, commercial, and industrial REITs.
ETFs (exchange-traded funds) are cheap and cost-effective investments that expose any investor to a diverse portfolio of stocks, bonds, and other assets. Hence, the decision to invest 50% of the earnings or $50,000 in this investment.
I will invest $20,000 or 20% of the portfolio in stocks. Investing in individual stocks or mutual funds/ETFs might offer more significant growth potential than conservative investments such as bonds and savings accounts. However, equities are riskier and more volatile, so diversification across firms and industries is essential. For instance, the allotment may be split evenly between Apple, Amazon, PayPal Holdings, Diageo plc, and EOG Resources Inc.
Financial Returns and Risks
To estimate the potential financial return of the investment portfolio after five years, let's assume the following annualized returns based on historical performance and forecasts:
· Real estate (REITs): 5% per year
· ETFs: 7% per year
· Stocks: 10% per year
Chart 1.
Note: Amount of investment per year
Using these assumptions, the estimated value of the investment portfolio after five years can be calculated as follows:
Year 0: Initial investment = $100,000
Year 1: Real estate (5% return) = $30,000 x 1.05 = $31,500
ETFs (7% return) = $50,000 x 1.07 = $53,500
Stocks (10% return) = $20,000 x 1.1 = $22,000
Total portfolio value after year 1 = $107,000
Year 2: Real estate (5% return) = $31,500 x 1.05 = $33,075
ETFs (7% return) = $53,500 x 1.07 = $57,245
Stocks (10% return) = $22,000 x 1.1 = $24,200
Total portfolio value after year 2 = $114,520
Year 3: Real estate (5% return) = $33,075 x 1.05 = $34,728.75
ETFs (7% return) = $57,245 x 1.07 = $61,333.15
Stocks (10% return) = $24,200 x 1.1 = $26,620
Total portfolio value after year 3 = $122,681.90
Year 4: Real estate (5% return) = $34,728.75 x 1.05 = $36,465.19
ETFs (7% return) = $61,333.15 x 1.07 = $65,713.59
Stocks (10% return) = $26,620 x 1.1 = $29,282 Total portfolio value after year 4 = $131,460.78
Year 5: Real estate (5% return) = $36,465.19 x 1.05 = $38,296.45
ETFs (7% return) = $65,713.59 x 1.07 = $70,389.50
Stocks (10% return) = $29,282 x 1.1 = $32,210.20
Total portfolio value after year 5 = $140,895.15
Therefore, the estimated value of the investment portfolio after five years is approximately $140,895.15.
Chart 2.
Note: 5-Year Performance of Investments.
Two key assumptions used to arrive at this estimated financial return include:
1. The annualized returns for real estate, ETFs, and stocks are based on their historical performance over the past 5 to 10 years. However, past performance cannot guarantee future results and can be impacted by various variables, including economic circumstances, interest rates, and geopolitical concerns.
2. Forecasted returns: The annualized returns of real estate, ETFs, and equities are also based on projected returns for the following five years. These projections are based on analysts' estimations regarding the companies' growth potential, earnings, and market trends. However, forecasts are inherently unpredictable and open to future errors or modifications.
Portfolio Monitoring
Monitoring your investment portfolio routinely is important for several reasons:
Performance evaluation: Regular monitoring of an investment portfolio allows any investor to evaluate its performance against their financial goals and benchmarks (Paolella, 2015). By tracking the portfolio's progress, one can make informed decisions about whether to continue holding, rebalancing, or selling their investments.
Risk management: Monitoring the investment portfolio also helps identify and manage risk. By tracking the performance of individual investments and asset classes, the investor can identify potential areas of weakness and adjust their portfolio to reduce risk.
By monitoring their portfolios, investors may ensure their portfolios are diversified across asset classes, industries, and geographies. It is significant because diversity helps decrease market volatility's impact on their entire portfolio by distributing risk.
Changes in market conditions: Frequent monitoring of the investment portfolio enables one to be informed of changes in market conditions that may affect their investments (Paolella, 2015). For instance, if an investor observes deteriorating stock price patterns, they may choose to lower their portfolio's equity exposure.
Rebalancing: Monitoring the investment portfolio also allows one to identify when to rebalance their portfolio (Paolella, 2015). Rebalancing involves selling overperforming assets and buying underperforming assets to ensure the portfolio meets its financial goals and risk tolerance.
References
Chart 1. (2023). Amount of investment per year.
Chart 2. (2023). 5-Year Performance of Investments.
Paolella, M. S. (2015). Portfolio Selection with Active Risk Monitoring. Social Science Research Network. https://doi.org/10.2139/ssrn.2616284
Smart, S., & Zutter, C. J. (2020). Fundamentals of investing (14th ed.). Pearson. https://ashford.redshelf.com/app/ecom/shelf/course-section/4924579
Real estate (REITs) ETFs Stocks 0.05 7.0000000000000007E-2 0.1
Real Estate EFTs Stocks Year 1 Total Real Estate EFTs Stocks Year 2 Total Real estate EFTs Stocks Year 3 Totals Real estate EFTs Stocks Year 4 Totals Real estate EFTs Stocks Year 5 Totals 1500 3500 2000 7000 1575 3745.0000000000005 2200 7520 1653.75 4007.1500000000005 2420 8080.9000000000005 1736.4375 4293.3205000000007 2662 8691.7580000000016 1823.2595000000001 4599.9513000000006 2928.2000000000003 9351.4108000000015 1.4059999999999999