A good investment portfolio requires proper investment decision based on the past, present and future market trends. This calls for thorough analysis of both the industry and the individual investment in order to ascertain the portfolio’s viability and profitability. This paper therefore highlights the investors’ profiles in the USA’s capital market and considers the current capital market information of the USA to help in building an investment portfolio.
The United States Capital Market is the world’s largest capital market with seven sectors and six categories of instruments.
The main sectors or the players are: Households, fund managers, corporate managers, bankers and brokers, foreign investors, insurance executives, and government officials. The securities (securitized instruments) include corporate equities, agency security and mortgages, fund shares, corporate bonds, municipal securities, and treasuries and open market.
There is a substantial difference in the sectors totals and the instruments totals due to the fact that only a percentage of the financial assets is securitized and traded.
Described hereunder are the primary players and their profile.
Households – These are basically individuals who (from their accumulated income, investment income, salaries, and wages) participate in the capital market. They borrow money for their consumer spending and home ownership. The household debts are then converted into asset-backed securities and mortgages.
Foreign Investors – Foreign investors basically sell more goods than they purchase into the American market thereby accumulating the dollars invested in the United States securities. Wealth that is accumulated abroad is also significant. In addition, foreign investors issue both stocks and bonds which finance businesses overseas.
Government Officials – Through the sale treasury bonds and municipal securities, money is raised. The main source of money, however, is the government taxes.
Corporate managers – Through financial intermediaries, corporate managers are able to stock and bonds thus raise money for the business purposes.
All the players are the investors in the capital market. To some extent, they are the issuers of securities. In addition, they lend and borrow on unsecuritized basis. The players’ motivation changes significantly depending on the economic factors, and the motivation of each player is different from other players.
Building the portfolio
In order to build a good portfolio, it is important to have the performance data of all the securities or instruments. In any case, the past performance doesn’t guarantee future results, and the current performance might be higher or lower. The returns and the principal value of investment fluctuates to an extent that when the shares are redeemed, they may be worth less or more compared to the original cost.
Building an investment portfolio starts with a better understanding of the process of investing. Investing process is the only noble approach to building an investment portfolio. This is due to the reason that it offers a rational order of purchasing securities. Besides, it helps reduce transaction costs associated with taxes and fees. There are various approaches to building an investment portfolio. For this paper, however, the approach considered is logical, consistent, and principle supported thus minimizes transaction taxes and costs.
i. Determination of the initial target portfolio monetary goal.
ii. Determination of the target percentage for every asset class.
iii. Calculation of the target amount for every asset class in both retirement accounts and taxable accounts.
iv. Researching on the potential candidates for the established financial assets so that the set goals are accomplished.
v. Purchasing of the assets and making a comparison of actual portfolio and target portfolio.
A good number of stocks exist. A performing investment portfolio is one which is diversified. It is thus prudent if one invests in a minimum of five stocks. Therefore, the following investment vehicles can be beneficial in building a diversified investment portfolio.
Mutual funds
Selecting a mutual fund for building portfolio is appropriate. Usually, a balanced mutual fund guarantees the investor complete diversification in varied number of asset classes. Better balanced fund have small cap, mid cap and large cap holdings basically for equity portion. This is advantageous since it contains different bonds. The bonds can provide income at time when the capital market is not performing well. Even though it is hard to find well balanced funds of 50/50 mix involving bonds and stocks, it is easier to have a mix of fund of 60/40 mix. Investing in mutual fund is simply smarter as they provide safety. Besides, mutual fund invests in multiple stocks. Losing the money invested is thus not easy. It is easy for an individual stock to go belly as opposed to a balanced mutual funds.
Investors can be conservative, moderately aggressive, or highly aggressive. The higher the risks, the more aggressive the portfolio is and the more profitable the investment is; and, the lower the risks, the more conservative the portfolio is, and the less profitable the investment is. A moderately aggressive portfolio is suitable. Described hereunder is an investment portfolio suitable for a moderately aggressive investor in the capital market.
Stocks (equities) = 60%
Bonds (and other fixed income securities) = 35%.
Cash and equivalents = 5%
Investing in stocks presents the investors with more risks and high returns. It’s therefore important to diversify the stocks based on the level of risk of the investor. A well diversified portfolio can include a 40% investment in large-cap stock, 10% in small-cap stock, and 10% in foreign stock. This will enhance consistency in long-term growth.
Bonds are more secure than stocks, i.e. they are not risky investments as compared to stocks. In addition, they are less volatile and offer regular income. It’s therefore important to invest 35% of the income in bonds to ensure these benefits. A 60% investment in stock ensures high returns and growth, though at higher risks; however, a 35% investment in bonds offsets the risk levels and presents the investor with regular income. A 5% cash and equivalent is necessary for the investor to meet the uncertainties.
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