Portfolio mgnt (1): The asset allocation decision

Before talkin' or even thinkin' 'bout investment, we need to talk 'bout insurance.

Stop thinking 'bout investment till you has put smth in your insurance: for your assets (house, car, etc...), yourself, to prevent from unemployment or accident.

U could say that insurance is low return & even, waste money. However, let's do double thinking. Do u want to have a chance to use your insurance? of course, not.

Insurance is only a tool to defense risk. That means, when risks happen, you or your lover will get money:
- if the assets were broken: u could repair or buy new one with the money
- if it was an accident to u: u could spend money for hospital services & for your consume during the time.
- if u lost your job: it helps u pay for your life while looking for new job
- if, unfortunately, u died: it pays for your funeral & for your lovers, your families to maintain their life after that.

To summarize:

• Insurance is for protection, not for return
• Insurance should be thought & done first, before having any investment plan
• Insurance helps us & our families, lovers to deal with unexpected problems, though typically, no one wanna have a "chance" to use the insurance money

After ensuring that u've paid for insurance, u can think 'bout an investment plan. Let's start with life cycle as different ages will have different tastes in horizon, risk & return.

Life cylce

From investment view, there're 4 period in a life cycle.

1. Accumulation phase: the early time in life
   
2. Consolidation phase: middle time in life
   
3. Spending phase: begins when individuals retire
   
4. Gifting phase: similar to, may be concurrent with Spending phase

Investors @ different period in life cycle are different btw:

• Horizon: longer => riskier
  
• Risk tolerance: longer horizon => higher risk tolerance => riskier (it also depends on individual tastes)
  
• Income & spending: higher income => higher risk tolerance; higher spending => less fund to invest, lower risk accepted.
  
• Goals:
• Near-term, high-priority goals: shorter-term financial objectives that individuals set to fund purchases that are personally important to them => high-risk investments are considered NOT suitable
  
• Long-term, high-priority goals: some form of financial independence, such as the ability to retire at a certain age. => high-risk investments can be used
• Lower-priority goals: it might be nice to meet these objects but it is NOT critical.
  

The portfolio mgnt process

1. Policy statement
   
2. Investment strategy, based on policy statement made by investors (also has advised by port. manager) & manager's knowledge 'bout current financial & eco. conditions & future trends forecasted by himself
3. Construct the portfolio
4. Continual monitoring of the investor's needs & capital market condition & when necessary, update the policy statement.

• The role of Policy statement: avoid future potential problems
  
• Understand & articulate realistic investor goals
• Create a standard by which to judge the performance of the port. manager.
• Other benefit:
• protect the client against a port. manager's inappropriate investments or unethical behaviors.
• Input to the policy statement
• Investment Objectives
• capital preservation: minimize risk of loss <=> maintain the purchase power, no need gain or return.
• capital appreciation: the port. grows in real terms over time to meet some future need. => capital gain.
• current income: port. concentrates on generating income rather than capital gain.
• total return: port. grows in real terms over time to meet some future need => capital gain + reinvest current income.
  
• Investment constraints
• Liquidity needs
• Time horizon
• Tax concerns
• Legal & regulatory factors
• Unique needs & preferences
• Importance of asset allocation
  
• risk diversification
• appropriate to investment term
• tax saving
• prevent from inflation
• reflect cultural differences