FM 105

investment and portfolio management

1 | FM 105 : INTRODUCTION by: CHERRY B. LANTICAN, MBA

 INTRODUCTION
Week 2 and 3

Performance Standards:
Students shall be able to:
1.) Explain investment and how it can hedge against inflation.
2.) Explain the factors on how to allocate investable funds and common investing mistakes.
3.) Compute how investment will grow using Future Value of 1 and Future Value of an Annuity of 1.

WHAT I NEED TO KNOW

At the end of this chapter, students shall:

1. Define investment management, investment portfolio, financial markets.
2. State how investment can offset the effect of inflation.
3. Enumerate Different forms of Investment.
4. Enumerate Factors in Allocating Investable Funds.
5. Define Financial Market and Enumerate Common Investing Mistakes.
6. Compute for the effect of inflation on purchasing power of the monetary unit.

WHAT I KNOW (Diagnostic Test)

TRUE or FALSE. In case your answer is false, explain.

1. An individual goal in making investments is to continuously accumulate wealth because
success is measured by the amount of material things owned.
2. Investment requires savings or minimizing current consumption to be able to set aside a certain
amount periodically.
3. An individual can prepare for his retirement by making small investments during his productive
years.
4. There are different forms of investments and one’s choice depends on his risk tolerance.
5. One who is not yet familiar with the different investment vehicles would preferably put his
money in stocks.

Are you now ready for the LESSON?????????

2 | FM 105 : INTRODUCTION by: CHERRY B. LANTICAN, MBA

 WHAT’S IN

Investment Management Defined

Investment mangement refers to to the process of defining investment objectives, adopting and
executing strategies to optimize results considering the risks involved and evaluating performance
periodically.

Personal Goal in Investing

When talking about investment, it is not necessarily a matter of continously accumulating
wealth or being materialistic. Rather, it should be looked upon as a means of reducing future financial
worries and ultimately, in providing financial and personal independence.

Investment Defined
Investment refers to assets acquired to realize income and/or earn profit. They are expected to
increase one’s equity or reduce future financial worries. Investing requires sacrificing some of current
pleasures with the hop and expectations that resources acquired will be enhance the future. One has
to save to be able to invest.

There are two types of investors: individual investors; Institutional investors.

• Individual investors are individuals who are investing on their own. Sometimes individual
investors are called retail investors.
• Institutional investors are entities such as investment companies, commercial banks,
insurance companies, pension funds and other financial institutions.

Investment Portfolio
Portfolio refers to the brief case that is used in carrying business papers and documents. In
business, it refers to to the aggregate of assets held as investments. Thus, the investment portfolio of
an entity or individual may consist of bank accounts, treasury bills, bonds, commercial papers, percious
metals and stones, stocks and real estate.

Investment as Hedge Against Inflation

Investment are made to protect one’s financial resources from the corroding effects of inflation.
The purchasing power of the peso is inversely affected by the constant rise in prices so that what peso
can buy now cannot be bought with the same amount three to five years hence.
Considering the effects of inflation, everybody should make investements while still in his
productive years.

WHAT IS IT
Change in Purchasing Power of the Monetary Unit Due to Inflation
Inflation reduces the purchasing power of the monetary unit so that if inflation rate were 8%,
what ₱100,000 can buy today would require ₱108,000 after one year. After two years, it would
₱116,640. In other words, the purchasing power of a peso after one year would be ₱ .9259259 (or
1/1.08).
3 | FM 105 : INTRODUCTION by: CHERRY B. LANTICAN, MBA
The figures would be as follows:

Amount Required to Buy Value of the Peso

P̄100,000 worth of goods
After 1 year ₱ 100,000 x 1.08 = ₱ 108,000 ₱100,000 / ₱108,000 = 0.925926
After 2 years ₱108,000 x 1.08 = ₱ 116,640 ₱100,000 / ₱116,640 = 0.857339
After 3 years ₱ 116,640 x 1.08 = ₱ 125,971 ₱100,000 / ₱125,971 = 0.793832
After 4 years ₱ 125,971 x 1.08 = ₱ 136,049 ₱100,000 / ₱136,049 = 0.735030
After 5 years ₱ 136,049 x 1.08 = ₱ 146,933 ₱100,000 / ₱146,933 = 0.680583

From the given tabulation, it may be noted that with an inflation rate of 8%, the goods that
₱100,000 can buy today would require ₱1 46,933 after 5 years. On Value of Peso, if you have one
peso after 5 years, the value of that today is ₱ 0.680583.

Compounded Growth
Compounded growth refers to the growth in investment portfolio brought about by ploughing
back the earnings therefrom. Thus, interest, dividends and gains become part of the principal based
on which future earnings are realized.

Future Value of 1. Used to determine the future value of an amount given today. (take a look
on the table above)
Example. If you have ₱ 250,000 now and earn 20% per year how much will be your money after 3
years? (₱ 432,000)

Answer: After 1 year ₱ 250,000 x 120% = ₱ 300,000

After 2 years ₱ 300,000 x 120% = ₱ 360,000
After 3 years ₱ 360,000 x 120% = ₱ 432,000
Or P250,000 x 1.728 = ₱ 432,000

Note: use analog or ordinary calculator

After 1 year [1.2]
After 2 years 1.2 xx = [1.44]
After 3 years 1.02 xx == [1.728]

Future Value of Annuity of 1. Refers to the accumulated amount of periodic contribution or

additional investments and earnings thereon as compounded for a number of years. Instead of making
investment at one time, there are periodic addition thereto, thus the term annuity.
Example: You saved P250,000 yearly for an interest of 20%. How much will be your money after 3
years? (P1,092,000)

Note: use ordinary calculator

After 1 year 1.2
After 2 years 1.2 xx = 1.44
After 3 years 1.2 xx == 1.728
Total 4.368

4 | FM 105 : INTRODUCTION by: CHERRY B. LANTICAN, MBA

Answer: P250,000 x 4.368 = P1,092,000

WHAT’S MORE

Forms of Investment
1. Savings Account. This is lending to the bank cash deposits that can be withdrawn anytime.
2. Time Deposit. This is lending to the bank for a fixed length of period. It earns interest higher
than savings account do.
3. Special Saving Deposit (Premium Savings Account). This earns a rate higher than that on the
ordinary time deposit.
4. Trust Investment. These are a pooling of investors money as evidenced by certificates issued
by trustee banks who are authorized to invest the money.
5. Treasury Bills. These are short term promissory notes issued by the national government.
6. Commercial Papers. These are interest bearing promissory notes issued by big firms and are
considered a low-risk form of marketable securities. Most of these are asset-backed securities.
7. Mutual Funds. These are a pooling of investors’ money by a stock corporation that issues
redeemable shares.
8. Bonds. These are interest bearing certificates of indebtedness issued by an organization.
9. Shares of Stock. These are shares in the ownership of corporate entities are evidenced by
stock certificates.
10. Real Estate. This refers to real property (land, buildings)
11. Precious Stones. Refers to diamonds because they appreciate in value due to their parity.
12. Precious Metal. Refers to platinum, gold and silver.
13. Other Forms of Investment. May be works of art and other collectibles like antiques.

Factors in Allocating Investable Funds

It is always advisable to spread investable funds to different forms of investment to avoid
“putting all the eggs in one basket” thereby providing leverage and consequently, minimizing risk. All
the foregoing factors are to be considered in making investments so that one cannot safely that one
form of investment is the best at all times
1. Investors Cash Needs. This refers to investors cash requirements for monthly operations and
planned changes therein as reflected in his cash budget. The cash budget may therefore be
used as a tool in determining when investments may be made and when the latter should be
disposed.
5 | FM 105 : INTRODUCTION by: CHERRY B. LANTICAN, MBA
 2. Risk Preference or Tolerance. This refers to the degree of risk that an investor can be
comfortable with or his appetite for risk. The greater is the risk, the greater must be the gain.
3. Financial Limitations. An investor with so many financial obligations, limited earnings or with
limited resources would prefer to play it safe by putting his money in fixed income and low risk
financial instruments such as time deposit, certificates and treasury bills.
4. Time Horizon. A time horizon of one year or less is considered short-term. If it is more that
three years, it is long-term. When the time horizon is short, the less risky investment vehicles
should be chosen. The reason for this is that with a longer time horizon, more risky investment
vehicles have the opportunity to recover in value and consequently, in market price.
5. Laddered Investing. This refers to timing investment maturities at staggered dates to jibe with
expected or planned cash outlays.
6. Market timing. This refers to buying and selling items of investment when it is advisable to do
so. In other words, get in and out of the market at the most opportune time.

Financial Markets
Financial markets are the venue for buying and selling financial instruments. They are usually
classified into money markets and capital markets. Money market instruments are those that are
often referred to as near-cash items and include short term, marketable, low risk debt securities
such as commercial papers and treasury bills. For capital markets, the financial instruments dealt
with the longer and riskier securities such as bonds, stocks and derivatives.

6 | FM 105 : INTRODUCTION by: CHERRY B. LANTICAN, MBA

 Investment management process
Investment management process is the process of managing money or funds. The investment
management process describes how an investor should go about making decisions. Investment
management process can be disclosed by five-step procedure, which includes following stages:
1. Setting of investment policy.
2. Analysis and evaluation of investment vehicles.
3. Formation of diversified investment portfolio.
4. Portfolio revision
5. Measurement and evaluation of portfolio performance.
Setting of investment policy is the first and very important step in investment management
process. Investment policy includes setting of investment objectives. The investment policy should
have the specific objectives regarding the investment return requirement and risk tolerance of the
investor.
Analysis and evaluation of investment vehicles. When the investment policy is set up,
investor’s objectives defined and the potential categories of financial assets for inclusion in the
investment portfolio identified, the available investment types can be analyzed. This step involves
examining several relevant types of investment vehicles and the individual vehicles inside these
groups.
Formation of diversified investment portfolio is the next step in investment management
process. Investment portfolio is the set of investment vehicles, formed by the investor seeking to
realize its’ defined investment objectives. In the stage of portfolio formation, the issues of
selectivity, timing and diversification need to be addressed by the investor. Selectivity refers to
micro forecasting and focuses on forecasting price movements of individual assets. Timing
involves macro forecasting of price movements of particular type of financial asset relative to fixed-
income securities in general. Diversification involves forming the investor’s portfolio for decreasing
or limiting risk of investment.
2 techniques of diversification:
• random diversification, when several available financial assets are put to the portfolio
at random;
• objective diversification when financial assets are selected to the portfolio following
investment objectives and using appropriate techniques for analysis and evaluation of
each financial asset.
Portfolio revision. This step of the investment management process concerns the periodic
revision of the three previous stages. This is necessary, because over time investor with long-term
investment horizon may change his / her investment objectives and this, in turn means that
currently held investor’s portfolio may no longer be optimal and even contradict with the new settled
investment objectives.
Measurement and evaluation of portfolio performance. This the last step in investment
management process involves determining periodically how the portfolio performed, in terms of not
only the return earned, but also the risk of the portfolio. For evaluation of portfolio performance
appropriate measures of return and risk and benchmarks are needed.

7 | FM 105 : INTRODUCTION by: CHERRY B. LANTICAN, MBA

 Common Investing Mistakes
The following are some of the mistakes committed in investing:
1. Failure to make financial plan for the future. Failing to understand one’s overall financial
situation and how wise investments fit in. Financial goals should be set considering one’s tax
situation, debt obligations, retirement provisions and insurance coverage.
2. Miscalculating risk tolerance. Risk can be avoided by putting all funds in savings accounts and
time deposit, but sometimes taking too much risk leads to the extent of borrowing money to
invest in high risk items of investment.
3. Failing to keep sufficient contingency funds. Failure to set aside sufficient amount of money for
emergency needs.
4. Jumping on the bandwagon. Joining the crowd to wherever it goes. It is buying when everybody
is buying and vice versa.
5. Inability to have leverage. Putting too many eggs in one basket or maintaining only one form
of investment.
6. Over-diversification. Spreading investable funds to so many items of investment resulting in
minimum gains because the investor is unable to keep track of developments that affect each
of the investment.
7. Erroneous timing of the market. Buying when it is time to sell and selling when it is time to buy.
8. Failure to keep a long-term perspective. Failure to look forward
9. Inability to cut losses. Inability to sell at a loss when prices are going down.

WHAT I HAVE LEARNED

EXERCISE #1
TRUE or False. Explain if your answer is false.
1. Inflation rate is 8%. This implies that if I have ₱ 300,000 today, its purchasing power after 9
years would be more or less equal to ₱ 160,000.
2. The investment portfolio of an individual may start with the saving account, time deposit and
jewelry.
3. Overdiversification of investment should be avoided because it is apt to reduce the amount of
investible funds for more profitable investment items.
4. A promissory note that will mature after two years is considered long term?
5. When you invest, you are assured of the gains.
6. A common mistake in investing is” falling in love with an investment” so that the investor is
unable to sell when prices are high.
7. An individual should have sufficient cash before he should think of making investment.
8. Investing is gambling.
9. Investment, in general, refers to speculative stocks.
10. Risk tolerance refers to the degree of risk incidental to each kind of investment.

8 | FM 105 : INTRODUCTION by: CHERRY B. LANTICAN, MBA

EXERCISE # 2 Effects of Inflation.
Lucio Dino is 24 years old and an employee with annual earnings of ₱ 260,000. Inflation rate
is 4% per annum. How much should be the increase in his earnings for each year during the next 5
years to offset the effect of inflation?

EXERCISE # 3
Mario has decided to keep his Christmas bonus of ₱ 20,000 in a time deposit which is expected
to earn 8% on the average.
1.) How much would it be amount to after 10 years?
2.) if he saves all his Christmas bonuses for 10 years, how much would he have at the end of the 10-
year period?

WHAT I CAN DO

Performance Task

1. What strategies may be adopted in investing? (mention at least 2 and discuss)

2. Investment are made to offset the effects of inflation. Explain how?
3. With the different forms of investment, which do you prefer? Explain why?
4. In allocating investable funds, which among the factors you most considered? Explain why?
5. How can you overcome the given investing mistakes?

RUBRICS FOR EVALUATION ON PERFORMANCE TASK

Grade
Criteria 80% 90% 100%
Content (50%) Demonstrates No or Demonstrates Fair Demonstrates Extensive
Limited understanding of the topic knowledge and Strong
understanding of the of the topic; Answer is understanding of the
topic. The essay did incomplete; Discusses topic; Answer is complete
not answer the some unrelated issues. and focuses only issues
question. related to the question
Organization Only some statements All statements of the All statements were
(25%) were consistent and essay were consistent but consistent and were
written with effective only some parts were written with effective
transition. written with effective transitions.
transitions
Support (15%) Provides incomplete Provides appropriate but Provides appropriate and
or inappropriate insufficient examples or pertinent information to
evidence to support evidence to support main examples to support main
the main points. points. points.
Timeliness Submitted after due Submitted during due Submitted before due
(10%) date. date. date.

9 | FM 105 : INTRODUCTION by: CHERRY B. LANTICAN, MBA