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Investment policy statement
The portfolio will include:
1. Domestic equity which consists of 60% of total portfolio allocated to different companies ( large and small )within many sectors
2. Mutual funds with 35% of portfolio
3. Remaining funds of 5% should be invested in corporate bonds.
Investment strategy
The investment strategy used in this portfolio is a tactical asset allocation. In this strategy, the investments will be regularly adjusted to the changing market conditions subject to forecasts or guesses of how the stocks are expected to perform in future. The aim of using this strategy is to optimize market exposure to the best by maximizing risk-adjusted returns. The initial investment will be 60% in stock, 35% in mutual funds and 5% in corporate bonds. The percentages are likely to change if, for instance, the investor expects the stocks to perform better, they may increase the investment in stock to 80% and reduce the investment in mutual fund.
Investment Rationale
The stock in the portfolio will hold the highest percentage of 60% because investment in stock has more advantages. First, investing in stock opens up the chance for the investor to earn two types of returns. The capital gains when the stock prices go up, and the dividends paid every year. Additionally, the investor will diversify the stock investments in different industries such that if one industry is making losses, they can earn a return in other industries. The stock will be invested in the following industries. Service industry 31%, healthcare 26.40%, conglomerates 3.60% and utilities 31%. The stocks are highly diversified to minimize risk and maximize returns. Second, the stock is riskier than bonds. Hence the high investment in stock is because the investor wishes to earn more returns by investing in high-risk areas.
Investment in mutual funds is 35%. Mutual funds are used to help the investor earn some level of return as experts in the market manage mutual funds. The expert is likely to make wise decisions for their investors hence better returns are expected from the 35% investment. Additionally, investing in mutual funds enables small investors to invest in a variety of stocks which they could not on their own due to lack of adequate resources.
The investment in corporate bonds is the least percentage of 5% because the risk is very minimal. The investor aims to invest in medium to high-risk securities. Since the corporate bonds have a relatively low risk, the investment is minimal.
The strategy used in this portfolio is a top-down investing approach whereby, the investor analyzes the market from the big picture down to the individual stocks. The investor will first determine the world economy by looking at the macroeconomic variables such as the statistics of the country and the national GDP then will look at inflation, interest rates and the prices of commodities. Based on the macroeconomic the investor will then determine which the best type of assets for the investment is.
Comparison.
The performance of the portfolio is compared to the NYSE index for the period. The NYSE index had an average percentage return of 1.63% (CNN) while the portfolio return for the same period was 1.38%. The portfolio performed lower than the NYSE, but its performance is relatively good. The lesson learned is that investment in high-risk stocks earns higher returns as the higher the risks, the higher the return. Additionally, using a tactical and a top-down strategy has helped maximize returns. When the investor is actively trading, they tend to earn more returns than when they are passive traders.
Works Cited
CNN Money. "NYSE Composite Index - CNNMoney.com." CNNMoney - Business,
Financial and Personal Finance News, 2017, money.cnn.com/data/markets/nyse.
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