Investment analysis and portfolio management

Student post 1:

I believe that safe investing is possible but not guaranteed. “Safe” is different for every investor. I don’t think that there is a magic formula for everyone. All of us have different goals and needs. I think that it is possible to achieve safe investing by, first, defining what our goals are and liquidity needs for the short and long term. Financial literacy is essential. Taking into consideration tax consequences can change our strategies to achieve our desired results. Like I said before, I don’t think that there is a magic formula, but planning ahead (and sometimes thinking about the worst-case scenario) can prepare us to put ourselves in a good position.

“The investing theory states that the higher the risk of your investments, the higher the expected return.” The last statement is true, but we should also remember that: the higher the risk, the higher the loss. In my opinion, we can use this theory to mitigate the losses. For example, suppose we pick two investments that are negatively correlated. In that case, we can obtain gains when one stock is doing well. Contrarily, suppose the stock is doing poorly, and we have losses. In that case, we can get some gains from the other stock benefiting from the market situation.

Before building our portfolio, we should look at the whole picture and ask ourselves some questions. How much do I have to invest? How much are my liquidity needs? Do I need cash in the short-term? (For example: are you buying a house or car soon? If so, when?). Maybe answering questions like these are not directly related to building our portfolio. Still, it will help us to set up our “limits for investing.” Then, asset allocation comes into play. The asset location will also vary per person. Someone close to retirement will not have the same asset allocation as someone in her/his 20s or 30s. There are two types of strategies for asset allocation: Strategic and Tactical. Strategic asset allocation could also be called “set it and forget it”. You select the percentage for each of the classes of assets and allocate funds among the classes according to those percentages. Rebalancing this type of asset allocation can happen quarterly, semi-annually, or annually. The other type of asset allocation is Tactical; this one could also be called “hands-on.” This type of allocation is determined and based on the market outlook; people try to time the market.

Financial instruments can be super helpful when the time comes to security selection. Nowadays, we can use online tools to open brokerage accounts. We should look at the commissions and minimum requirements as well. There is so much information out there; we should make sure we make informed decisions from reliable sources. When we buy equity or debt securities, we can have two approaches: we can look at the technical analysis or fundamental analysis. Are we actively trading, or are we buying and holding the security in our portfolio?
A 10-k report is a comprehensive report filled annually by public companies about their financial performance. Reading these types of reports can help us to use fundamental analysis before making a decision.

I think it is important to note that diversification is not the same as asset allocation. Asset allocation consists of using multiple asset classes (i.e., Equities, Fixed-Income, cash) to diversify market risk (risk not associated with the business). However, diversification can help us to reduce the unsystematic risk. For example, if 70% of our portfolio is going to stocks, we should pick more than one company (don’t put all your eggs in one basket).
Being informed every day is also important. Reading the Wall Street Journal and other websites where we can see the market performance can help us to change our strategies if needed.

Student post 2:

Safe investing is an interesting process whereby investors are able to safely invest and still have overwhelming risk making investments depending upon the financial instruments they invest and strategies/tactics they apply to maximize their gains, while still being safe.Yet, investing is a process involving risk and return and is defined as low-risk equating to low expected returns, while high returns involves high risk, therefore pure safe investing is not possible (Picardo, 2020). Instead, you can control the amount you may want to invest in terms of the level of risk you want to associate with your investment return, but limit and control the amount of risk reward for your investment. Different financial instruments and strategies can be used to minimize investment risk and make it safer for every investor to invest, however there isn’t an investment that exists surrounding no risk and still experience financial gains.

The route to go to minimize investment risk and invest in safer investing is to go with low-risk investments. The ways to do this is with investing in Certificate of Deposits (CDs), U.S Savings Bonds, Municipal Bonds and Money Market Funds. These investments have a couple of things in common. For one, they are low-risk and low grade investments that require the lowest risk in stock market investments versus the rest of the higher risk investment that are not as safe as the low-risk investments. In addition, these investments are all long-hold investments that have more of a lifelong investment that pose the greatest safety and reward for the investor versus short-term high risk investments that will jeopardize safety and display high risk. Certificate of Deposits revolve around voluntary pool of capital into the depot is and leave it in there for a set period of time and received accrued interest overtime and is protected by the FDIC for up to $250,000 in terms of avoidance of losses, but look to save for their retirement deeming it a safe investment (SoFi, 2020). Next, U.S Savings Bonds issued by the Federal government is deemed as one of the safest investments, due to the income received through interest rates that take time to mature, but inflation prohibits possible maximization. Rather, the government backing of these bonds recognizes them as low-risk, but safe investments. Moving on, Municipal Bonds are also represented as safe investments for its government involvement from the state and local levels as investing within mutual funds or ETFs, but are callable for its very nature for its ability to be called back before its maturity is maximized and is not able to receive further gains (Esajian, 2020). Lastly, Money Market Funds is another safe investment vastly sought out that involves investing in mutual funds in cash securities with high credit ratings that develop interest rates to be paid to investors in dividends and maintains the net value of the investment without any government help purely based upon the value of the mutual fund the investor chooses to invest in that is a long-term hold.

With picking and issuing the right investments based on their situation investors are safely able to make sound investments for their future and even short term through financial instruments to safely invest and maximize their investments. Again, investors are able to save investments through low-risk, but this encompasses little financial gain versus high-risk high reward investment in financial instruments.

References:

Esajian, P. (2020, June 12). What Are the Safest Investments? 5 Safe Investments for Your Future. Retrieved January 24, 2021, from https://www.fortunebuilders.com/safest-investments/

Investopedia. (2021, January 22). What is the safest investment? Retrieved January 24, 2021, from https://www.investopedia.com/ask/answers/021615/what-safest-investment.asp

Livingston, A. (2019). 7 Safest, Low-Risk Investments for Your Money. Retrieved January 24, 2021, from https://www.moneycrashers.com/safest-investments-for-your-money/

Picardo, E. (2020, September 16). Investing Definition. Retrieved January 25, 2021, from https://www.investopedia.com/terms/i/investing.asp

SoFi. (2020, October 22). Is There Such a Thing as a Safe Investment? Retrieved January 24, 2021, from https://www.sofi.com/learn/content/what-is-a-safe-investment/

Updegrave, W. (2018, April 4). Where can I find no-risk investments? Retrieved January 24, 2021, from https://money.cnn.com/2018/04/04/retirement/no-risk-investments/index.html