Portfolio Management
Portfolio management is the art and science of selecting and overseeing a group of investments that meet long-term financial objectives and maximize expected returns, within an acceptable level of risk exposure. Stocks, Bonds and Gold are three of the most common investment products (and used in the game).
Stocks
Stocks represent a fractional ownership of a company. Investors who purchase a company’s stocks become shareholders of the company and are entitled to receive a share of the company’s profits in the form of periodic cash payouts, known as dividends. Investment returns from stocks are not just dividends, but also capital appreciation when the price of the stock increases. Stocks of public listed companies are usually purchased over an exchange, an example of which is the Singapore Stock Exchange (SGX).
Bonds
Bonds represent loans made by investors (bond holders) to borrowers (bond issuers). Like stocks, most of these bonds (corporate or governmental) can be publicly traded over an exchange. Bond holders receive fixed interest payments, known as coupons, over the duration of the bond. At maturity (when the bond becomes due), the principal loan is repaid to the bond holder. Investment returns from bonds are both the coupons, as well as capital appreciation. Compared to stocks, bonds tend to have a lower investment return but are also generally considered less risky.
Gold
Gold is one of the most precious metals in the world and is often viewed as a good diversifier of a long term investment portfolio. They can act as a hedge/protection against inflation and are a good store of value through thick and thin. However, like most physical assets, there are storage costs for holding gold. Investment returns from gold are in the form of capital appreciation.
Market Cycle
The market moves like a pendulum. On some occasions, the economy is doing well in a boom market - investors feel confident and optimistic about the future. This optimism is reflected in the choice of asset classes; investors start to have “animal spirits” and are willing to pay an irrationally high price for riskier asset classes such as stocks with higher investment returns. Greed rules, and everyone is willing to take on risk.
However, just like a pendulum, these bullish sentiments do not last. Eventually, due to excess capacity built up during the good times, the economy will experience a slowdown or a recession as it tries to adjust back to equilibrium. Investors then become extremely pessimistic about the future and flee to the safety of cash. Fear rules, and everyone generally becomes averse to taking risk.
Rockstar portfolio managers understand this pendulum dynamic. They understand a stock’s intrinsic value, buy stocks on a bargain during recessions and sell stocks which are overpriced during boom markets. They know that, at times, other asset classes (such as bonds) represent better value for the risk incurred. And they know that despite the storage costs involved, gold represents a great portfolio hedge and store of value during a weak economy.