Risk profile
As the world keeps changing, the needs of people also change. This means that the way investments are done in the new world should also change so as to meet the global portfolio. The risk analysis determines the global portfolio that most of the investors are putting along during their investment (Tung, 2014 p.102). Asset allocation such as mix of bonds, money market account, and real estates are some of the example of how investments are done in the new world. Before making any investment, it will be crucial if one conducts the personal risk analysis and then compare it with the standards of the global portfolio.
A risk analysis is a method that one can use to determine the areas of interest in the market. For example, one can use the analysis to understand where to invest and how to invest. Both the primary and the secondary goals of the one’s finance are considered. The long-term and the short-term inflation hedge are some of the important factors that will influence the manner of investments. So as to have better money manager within the society, all investors should take the initiative of analyzing their risks.
Personally I feel more interested in investing in the emerging oversea markets. The local market has been populated too much by other investors. So as to have some green pasture, I will feel most interested in investing in the oversea market. Markets such as the African market are growing pretty faster meaning that it is a possible source of real market. The risk in the oversea market is, however, high, but the returns from the business might look great. The oversea markets are also the best places to invest into since the requirements to perform the company are never that harsh like the local market.
Mizell et al. (2014) asserts that having to buy some shares in an older established company can be an easy and faster way to get to the top financially (p.350). However, this method at most of the time has been very futile since most of these older established companies do sell their shares at a very cheap price. The higher number of the shareholders in such companies also means that the profit that is realized after a period will be shared amongst a bigger number of beneficiaries. In that case I would be much interested in investing in the upcoming companies so that my investment can rise with the increase of the enterprise. This method also looks very challenging since such companies do take much time to develop and make many profits.
According to Sandhu et al. (2012), saving in the bank through bonds is a good way to earn interest (p.60). The benefits received from such banks are always after a period. To win a higher amount of interest means that one will have to save much money. When you save much money in the bank account will mean that you will not have a lot of money at hand. People always feel less innovative when they do not have cash at hand. Instead of putting your money in the bank and waiting for the interest, I think it is a good idea to invest in the market. Putting your money into an investment will mean that you are risking your money on the performance of the business. Personally, I will never advise someone to put his money in the bank and wait for interest. The biggest risk one can ever never do to take a risk. That person who is putting the money in the bank to earn some interest is not taking any risk and in that case putting the money at risk. The only way to invest is to put the money into the market and forget about the banks.
Financial goals can be either short term or long term. The short term financial goals are those goals that one intends to meet in less than two years (Tung, 2014 p.102). Personally, my short term goals are to secure a loan from the National bank that will assist in revamping my business to be fully online. Technology is changing how things are done. This means that how goods are advertised to the market have been entirely different from the past. The other financial goal is to purchase a car that will help in reaching the higher number of customers. When talking about the financial goals, we can differentiate the between the vital, essential and luxurious goals. In my case, the principal goals include paying for my school fee as early as possible. The other important objective is to have my new company be registered with the national secretary so as to make a business in the national map. The luxury goal, on the other hand, is to visit some of the sand beaches of Africa. During the winter, it is always very nice to go and have some vacation away from work so as to have some mind development and rest.
Protecting the capital in the investment against the decline in the market is another financial goal that I have put into place. To do this, the company is only willing to take the risk in investing in those markets that will bring a return. Investing in a market that has no future is never the best market idea. In this case, it will be very unfair to say that I will not invest in any new idea. Investing in a new idea can be a good way to take into the market but that should have been proved to be working and productive.
In a research done by Bisdee et al. (2013), they found out that, capital appreciation increase is a way of increasing the investments that one has used into the market (p.510). This kind of financial goal is a way to expand an already existing market. In most cases, people have used much money to inject into the already existing market. According to most of the business men and women, this has been a good way of business expansion. I think that what people have not been realizing is that it will be very difficult to determine the performance of the company if one keeps on bringing in money from the other sources. The best way to do business is to make good use of the initial capital to the maximum. The initial capital used into the market should be the one utilized in the development of business. If a company is on the brink of failure, it can mean that there are things that are not done in the right manner. In that case I will not invite the expansion of business through external investment. The profits made in a particular business should be used to expand that particular business.
High levels of inflation in the recent past have shown that the short-term inflation hedging are never the best methods. The biggest problem that long-term investors have been facing all since is to achieve a level of real return that has the consistency with the investment objectives. The type of asset that will provide the most efficient hedge against inflation has been a topic of discussion amongst many investors. It is this problem that has made most of the investors to adopt the traditional asset classes. Asset allocation determines how inflation will affect the business example:
a) Bonds
` There is a strong link that exists between the price and the expected return on bonds. This link can also be seen in the short-term interest rates and the value of bond performance. The present value of the cash flow will determine the price of the nominal risk-free bond. This means that the rates of returns for most of the banks are greatly influenced by the rate of inflation. Bonds have also been accused of causing the inflation in most of the market setups. When banks are competing to offer the best and give the best interest, cases arise where such banks give very high interest rates. When a bank is offering lower interest rate, there will be very few people who will be saving in other words; much money will be circulating in the market. On the other hand, higher interest rates usually attract investors to save more money so as to earn interest. With more money saved, there will be little circulating in the market and hence low inflation rate. What this means is that so as to be safe from inflation, the investment need to learn how to deal with the asset allocations. Another way to deal with the long-term inflation hedge is to understand how to purchase the goods from the market.
b) Corporate Equity
Equity provides the most efficient hedge against inflation. The inflation level can be reduced through the use of the Equity since it is this Equity that pass inflation through the higher price. A business can have a positive effect even if there is a higher level of inflation if such a company employed corporate equity. When a company uses real interest rates while dealing with capitalizing the firm, it can be spared the agony of inflation. The tax effect is another hypothesis that shows that that company that uses a corporate equity cannot be influenced in any way.
Asset allocation
Asset allocation is a way to diversify the investments of a business. It ranges from cash, stock and bonds such as money market funds. The choice of the asset allocation will depend on the nature of the investment that is the age of the person investing and whether the business needs any diversification. Before choosing on the kind of asset allocation, one needs to understand the benefits of asset allocation first. The following as some of the advantages that one can get when he or she diversifies the business:
Asset allocation helps in reducing risk. When you spread the market risk across different assets, there will be a lower rate of risks in the market. For any market or business, therefore, to reduce the rate of risk to very minimal, it needs to allocate the assets as appropriate as possible. Asset allocation such as bonds and cash will help one to spread the risks across both the bond and stock. This means that when there is a high inflation the business can still gain from the interest of the bond. On the other hand, a company can still improve even if the cash held at hand disappears. Cash can get stolen or can be interfered with by the natural disasters. Real estate, on the other hand, can stand both the harsh economic state and a good financial state. This will put a smile on the face of an investor who uses this kind of asset allocation since such risks as inflation will have very minimal effect on real estates.
Asset allocation broadens the chances of an investment to earn more consistent returns over time. When a business is diversified, the investor finds himself in the best position to earn from different areas. A business is a challenging endeavor that doesn’t want people to put all the eggs in a single basket. Casting the net in various ponds is the best way of approaching the business. Those who diversify their business can earn from another asset even if the other fails. So as to be on the right side, therefore, all companies should allocate their assets.
Staying focused on the goals of the company can be as a result of asset allocation. A well-allocated portfolio will alleviate the needs to constantly adjust to the investment positions and chase the newer trends in the market. According to Yin (2014 p.572), a business that offer a better asset allocation means that such a company will always keep an eye on the different assets allocated and in that case can even become more innovative. An innovative investment is the best in the changing marketing trends. When you are staying focused on your goals then, you will undoubtedly collapse.
In this case I will choose to use the stocks and bonds as an asset allocation for my investment. In this case, I will allocate 70 percent of the stock. The reason for allocating 70 percent of the assets of stock is me the line with the right thumb rule. According to the rule when an investor is in the age of between 30 and 40 then he need to allocate not less than 70 percent of the assets in the stock. At the age of 27, I am approximately near the required age standard. This means that I am bound by the right thumb rule which tells me to have the minimal of 70 percent of the assets allocated to the stocks.
Stocks and bonds provide a very broad category that one can choose. A variety of types means that when one of the categories is not working well then one can move to the other. Amongst the available types include;
Large-cap stock
This is a category that deals with the largest companies in the land. The needs of the bigger companies can be learnt, and the solution provided. This is the reason I can choose to allocate the assets of my investment using the stock. When a company grows through the ranks, it can move from one category to another. This will give the company a chance to work harder so as to move from one class to another. The other categories include;
Growth stocks
Corporates that have exhibited the gains that re faster than the average can be ranked in this category of inventories. Developing companies can also be found in this category. Under each and every category, the interests earned are different, and the services offered are also different. In that case one can choose the best category that will favor his or her business. Bonds, on the other hand, also have the categories under which the investments are categorized. They can include;
Government bonds
These are the kinds of bonds that are always sponsored by the government. The income from the bonds is always taxable. The economy of the country is the factor that influences the amount of bonds that can be given to an investment. During the time, the country is enjoying the economic might it can offer high bonds. On the other hand, during the period of inflation the government can provide lower bonds.
Municipal bonds
The national government is always not the only source of obligations. The local government that can include local administration agencies can also offer bonds. The interest earned on the municipal bonds is not subject to taxation and in that case a good source of fund. The interest earned can be used in strengthening the investment.
Why stock and bonds
Asset allocation has worked for many companies that just begun from small investments. Bonds and stocks are the best way to allocate the assets due the interests that are expected in the long run. Unlike the real estates, which require colossal money to start off with, stocks and bonds are all exclusive. These kinds of asset allocation are the best strategy that one can use in approaching the ever changing market. Risks are always very few when one choose to use stocks and bonds. The only risk that is always there is the changing economic trends. The government will always tend to lend very few when the country is facing economic recession. The interest return rates are also always high during the cases of economic downturn. Apart from these challenges, this is the best way of allocating the assets. Comparing stocks and bonds with cash, bonds are the best way amongst the many. Most of the investments do not like allocating cash the assets. When cash is allocated the assets there are higher possibilities of risk. Apart from the personal danger, the market is also in the risk of inflation. The investment can also lose the money through the impulse spending.
The freedom that an investment enjoys over the bonds is some of the factors that have made most of the people to like bonds. In most cases, the investment will always work towards achieving the market the best. When the economic environment is right then, the government will reward the bonds abundantly. Bonds and stock are, therefore, in a way helps the investment always to work towards improvement and to make the best out of the worst. It will be worth concluding that all investments should know how to allocate their assets as this will lead to the growth of production.
Reference
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Meng, H, & Siu, T 2014, 'Risk-Based Asset Allocation Under Markov-Modulated Pure Jump Processes', Stochastic Analysis & Applications, 32, 2, pp. 191-206, Academic Search Premier, EBSCOhost, viewed 1 December 2014.
Mizell, J, Berry, K, Kimbrough, M, Bentley, F, Clardy, J, & Turnage, R 2014, 'Money matters: a resident curriculum for financial management', Journal Of Surgical Research, 192, 2, pp. 348-355, Academic Search Premier, EBSCOhost, viewed 1 December 2014.
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Sandhu, H, Nidumolu, U, & Sandhu, S 2012, 'Assessing Risks and Opportunities Arising from Ecosystem Change in Primary Industries Using Ecosystem-Based Business Risk Analysis Tool', Human & Ecological Risk Assessment, 18, 1, pp. 47-68, Academic Search Premier, EBSCOhost, viewed 1 December 2014.
Tung, R, Baumann, C, & Hamin, H 2014, 'Cross-cultural management of money: The roles of ethnicity, religious affiliation, and income levels in asset allocation', International Journal Of Cross Cultural Management, 14, 1, pp. 85-104, Academic Search Premier, EBSCOhost, viewed 1 December 2014.
YIN, L, & HAN, L 2014, 'Study of international commodity assets industry allocation strategy. (English)', Xitong Gongcheng Lilun Yu Shijian (Systems Engineering Theory & Practice), 34, 3, pp. 560-574, Academic Search Premier, EBSCOhost, viewed 1 December 2014.
