Bài giảng Essentials of Investments - Chapter 21 Investors and the Investment Process

The Four Stages of the Investment Process 1. Specifying objectives 2. Specifying constraints 3. Formulating policy 4. Monitoring and updating portfolio

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INVESTMENTS | BODIE, KANE, MARCUS Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin CHAPTER 21 Investors and the Investment Process INVESTMENTS | BODIE, KANE, MARCUS 28-2 The Four Stages of the Investment Process 1. Specifying objectives 2. Specifying constraints 3. Formulating policy 4. Monitoring and updating portfolio INVESTMENTS | BODIE, KANE, MARCUS 28-3 Specifying Objectives • Investment managers must assess the level of risk investors can tolerate in pursuit of higher returns. • Objectives and risk tolerance differ by type of investor. INVESTMENTS | BODIE, KANE, MARCUS 28-4 Figure 28.1 CFA Institute Investment Management Process INVESTMENTS | BODIE, KANE, MARCUS 28-5 Table 28.1 Components of the Investment Management Process INVESTMENTS | BODIE, KANE, MARCUS 28-6 Table 28.2 Components of the Investment Policy Statement INVESTMENTS | BODIE, KANE, MARCUS 28-7 Table 28.3 Determination of Portfolio Policies INVESTMENTS | BODIE, KANE, MARCUS 28-8 Table 28.4 Matrix of Objectives INVESTMENTS | BODIE, KANE, MARCUS 28-9 • Liquidity – Ease (speed) with which an asset can be sold and created into cash • Investment horizon - planned liquidation date of the investment • Regulations – Prudent investor rule • Tax considerations • Unique needs Specifying Constraints on Investment Policies INVESTMENTS | BODIE, KANE, MARCUS 28-10 Table 28.5 Matrix of Constraints INVESTMENTS | BODIE, KANE, MARCUS 28-11 Policy Statements • The Policy Statement (IPS) provides for: – Governance of the investment program, – The appropriate asset allocation, – Roles of internal and/or external managers, – Monitoring the results, – Risk management, – Appropriate reporting, – Accountability – A course of action in case of market turmoil INVESTMENTS | BODIE, KANE, MARCUS 28-12 Asset Allocation • By far the most important part of policy determination is asset allocation, that is, deciding how much of the portfolio to invest in each major asset category. 1. Specify asset classes 2. Specify capital market expectation 3. Derive the efficient portfolio frontier. 4. Find the optimal asset mix. 5. Manage taxes. INVESTMENTS | BODIE, KANE, MARCUS 28-13 Managing Portfolios of Individual Investors • Human capital and insurance • Investment in residence • Saving for retirement and the assumption of risk • Retirement planning models • Manage your own portfolio or rely on others? INVESTMENTS | BODIE, KANE, MARCUS 28-14 Tax Sheltering for Individual Investors • Tax-deferral option - controlling the timing of gains on investments. • Tax-deferred retirement plans – IRAs – Keogh plans • Deferred annuities – Fixed – Variable • Variable and universal life insurance INVESTMENTS | BODIE, KANE, MARCUS 28-15 Pension Funds • Defined contribution plans – Investment policy is essentially the same as for a tax-qualified individual retirement account • Defined benefit plans – Contractual arrangement setting out the rights and obligations of all parties INVESTMENTS | BODIE, KANE, MARCUS 28-16 Pension Funds • The tax status of pension funds makes them favor assets with the largest spread between pretax and after-tax rates of return. • Pension funds make use of immunization. • Investing in equities occurs for both correct and wrong reasons. INVESTMENTS | BODIE, KANE, MARCUS 28-17 Investments for the Long Run • Advice from the mutual fund industry: • Don’t try to outguess the market by moving your money in and out. Buy and hold instead. • Diversify to reduce risk. • Put money in stocks, bonds, and money market mutual funds. • Avoid keeping 401(k) money in a company’s low- risk default investment scheme. • Be wary of investing a large percentage of your 401(k) in your company’s stock. INVESTMENTS | BODIE, KANE, MARCUS 28-18 Investments for the Long Run • Investment horizon determines which risk-free rate to choose. • Make simple investment choices such as TDRFs (target date retirement funds). • Inflation risk and long-term investors: – TIPS are helpful but not really risk-free. – Market value can fluctuate. – Reinvestment rate risk
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