Research Proposal on "Investment Portfolio"

Research Proposal 15 pages (4880 words) Sources: 15

[EXCERPT] . . . .

Investment Portfolio

Over the last several years, the stock market has been through a tremendous amount of ups and downs. Part of the reason for this, is because of the recession that began in 2007, caused the price of stocks to decline sharply from: the global financial crisis and subsequent recession that occurred. This is significant, because it shows how the volatility in the equity markets can become very extreme, as the economy moves between the different cycles.

For investors, this is challenging in trying to find the right areas that can provide significant long-term growth. As most people will often utilize: the latest strategy that is working in the current market conditions. This is problematic, because it can mean that they are purchasing an investment when the price of the stock could be at its all time high. A good example of this can be seen with the various investments surrounding Internet stocks in the late 1990's. What happened was many of the people assumed, that the economy was shifting. As the advancements in technology, meant that computers were quickly becoming an integral part of daily life. One of the areas, where this change was being felt the most was Internet, which was helping people to: connect and interact with each other on an unprecedented scale. As a result, many people began to invest in a host of Internet related stocks, in an effort to capitalize on the changes that were taking place. However, beneath the surface many of these companies were not making any money. Instead, they were taking the funds that they were receiving from investors, and began to fuel their continuing expansion. The basic idea is that these companies were on the verge of being able to: redefine the way business is conducted. Therefore, any kind of issues (such as: losses) will take care of themselves over the course of time. (Western)

Once this began to occur, was the point that the company would experience tremendous financial problems. As shifts in the economy and the inability to post a profit, had an impact upon the financial strength of a number of different companies going forward. Evidence of this can be seen by looking no further than Dr. Koop.com. This was one of the up and coming dot.com stocks that went public in 1999. At the time, it was considered to be one of the premier health websites by topping out at: number one on the search engine rankings and they had the name of the famous former Surgeon General Dr. C. Everett Koop. This caused the price of the stock to climb as high as: $45.00 per share after going public. As investors, became excited about future profits; especially when it was announced that they had formed a strategic alliance with AOL. At the time, AOL was considered to be: most dominant ISP on the market and the partnership gave the company instant credibility. Yet, beneath the surface they were losing tens of millions of dollar every day. By December 2001, the company was forced into bankruptcy, because their business model was not sustainable over the long-term. ("Ten Big Dot Com Flops") This is significant, because it shows how many investors will often assume that they can receive above average returns. However, they do not investigate the financial strength of: the company and will often become caught up in the mania. At which point, the overalls amounts of risks to: the portfolio increase substantially.

For investors, this should serve as warning that they need to be watchful of: new trends and the potential long-term benefits / risks of investing in key industries. In the case of the portfolio that is being constructed, we will seek out investments that are considered to have moderate amounts of risk. This is will be accomplished by examining the: investment goals for the strategy, the rational for asset allocations and looking at the performance of each security that was chosen over the past three years. Together, these different elements will provide the greatest insights, as to what kind of strategy should be utilized to: provide consistent long-term growth to the portfolio over the next ten years.

Investment Goals

The investment strategy we are using is designed to outperform: the historical average stock market return of 6.3%. (Burtless) to achieve this objective, at least 60% of the portfolio will be invested in equity securities at any given point in time. We will be starting out with $100 thousand in cash and will focus exclusively on stocks. There will be: no direct mutual funds or real estate investments. Instead, the portfolio will be focused on providing stocks that can increase the returns in comparison with the historical stock market average.

As a result, the risk tolerance level for the portfolio will be geared towards: moderate amounts of growth and mitigating any kind of potential losses. This is important, because we are taking a similar kind of approach, in comparison with many of successful investors such as: Warren Buffet and Eddie Lampert. As they will look for outstanding valuations, that can increase their long-term potential growth, while limiting the underlying amounts risk. Over the years, this strategy has proven to be successful, as both men have been able realize consistent long-term returns of 29%. (Berner) This is significant, because it shows how we can use a similar kind of philosophy that will produce the same kind of returns. Therefore, our strategy will seek to mirror, the growth that is realized by these two investors, while being able to outperform the average historical returns of the markets. As a result, we are seeking to have a portfolio that can be able to deliver consistent growth of between: 6.3% and 29% a year.

When you put these different elements together, this is illustrating how our approach will be based on: finding those companies that can provide above average growth and consistent dividends. These factors will help to prevent us from: purchasing those stocks that are experiencing temporary surges and focusing on companies that can provide an above average return over ten years. Once this takes place, it will ensure that the portfolio has a balanced strategy that will deliver higher amounts of growth, while reducing the underlying risks.

The Rational for Asset Allocations

The current environment for investing is becoming very challenging. Part of the reason for this, is because there a number of different cross currents that could have a tremendous impact on the return of the portfolio. Some of the most notable includes: rising inflation, increasing corporate earnings and geopolitical tensions. Rising inflation is problematic, because the sharp increases that have taken place over last years, have brought into question the sustainability of the recovery. A good example of this can be seen by looking no further than the sharp increases in food prices over the last year. As the various weather related disasters, have meant that prices have increased to record highs. The below table illustrates the overall increase in food prices that have taken place throughout 2010. (Hennigan)

2010 Increases in Food Prices

Commodity

Percentage Increase

Corn

88%

Wheat

76%

Soybeans

37%

(Hennigan)

This is significant because, it is showing one of the major issues that will be constantly affecting investors during the next ten years will be inflation. Part of the reason for this, is because of increasing demand from traditional markets (such as: the United States). At the same time, countries that are rapidly developing (most notably: China and Brazil), have been contributing to the overall increases that are taking place. This is problematic, because it means that the possible recovery could be derailed by a sharp increase in inflation. As a result, our strategy must take this into account, in order to achieve higher returns. (Hennigan)

Since 2009, the overall quality of corporate earnings has been increasing. The reason why, is because the economy formed a bottom during this time and has begun to experience a gradual recovery. Recent evidence of this can be seen by looking at the 2010 earnings that were reported by S&P 500 companies. As 85% of them have been beating analysts' expectations and they have been raising guidance. (Wagner) However, the recovery has been very slow and many sectors of the economy have been lagging. A good example of this can be seen with the unemployment rate, as this number has continued to remain at 9%. ("Job Growth Accelerates") This is problematic, because it means that the economy could either be: entering an early period of sustained economic growth or it could be going through a similar to the time frame from: 1975 to 1978. In this case, the U.S. economy recovered from a serve recession. However, within a few years it would experience similar kinds of challenges (stagflation), as the recovery was short lived. (Weinstien) This is important, because it shows how the economic growth that is being experienced is very tepid. As a result, either one of the above scenarios could be… READ MORE

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