Investment Strategy and Investment Management

By TM on Sep 24, 2009 with Comments 0

Growth in the amount and value of assets is important to the overall worth of a company and the wealth of its stockholders. Among the various types of assets a company may possess, most require investment management. Fixed assets (also known as long-term assets) are generally forms of physical property that are held for a long time (for instance, buildings, equipment, and heavy machinery) and that are used to generate revenue. Most fixed assets lose their value over time due to wear and tear, a process called depreciation. Bonds are another kind of fixed asset. A bond is a long-term loan an investor makes to the entity that issues the bond, for example, the United States government. Current assets (also called liquid assets) are held by an investor for relatively short time spans, typically less than 12 months, and they can be easily converted to cash, sold, or consumed. Examples of a company’s current assets are cash, tradable stock, and inventory.

When a group of assets have similar characteristics, generally perform similarly when invested in, and are regulated in the same way by laws, they are said to be in the same asset class. Equities, which are public stocks, are in one such asset class. Fixed-income bonds are in another, and cash equivalents such as bank certificates of deposit are in yet another.

Investment portfolios are typically managed through decisions about purchases and sales of assets. Investment managers must be able to analyze the finances of investors, understand how to select different types of assets, set realistic investment goals, and know how to monitor investments and make adjustments when changing economic situations require them.

When an investment manager is first engaged by an investor, the manager generally begins by analyzing the investor’s current financial situation to create a profile. This activity involves assessing the net worth of the investor, which is the value of all property owned (assets), less any debts or obligations (liabilities). It also involves determining the cash flow of the investor, which is the amount of cash earned in a certain time period after paying all expenses and taxes.

After the investment manager has established the investor’s financial profile, the manager and the investor work together to identify and define investment goals. Goals depend on many factors, including the percentage of wealth the investor wants to commit, the level of investment risk appropriate to the investor, the desired rate of return (the earnings expected from an investment over a specific time period), and the relative percentages of the total investment that should be put long-term and short-term assets.

Next, the investment manager employs financial models that assess the likelihood of achieving the investment goals. These models, which are run on a computer, use statistics, mathematics, logic, economic information, and other resources to construct a representation of a particular investment strategy over time. Results from the models give the investor and the manager and idea of how realistic the investment goals are. If they have concerns about realizing these goals, they can adjust their overall strategy.