Investment Principles

Investment are a usual word in our life, so many people talk about investment, not only in financial but also in their daily activity. But do you know what investment itself? Investment is putting money into something with the expectation of gain, that upon thorough analysis has a high degree of security for the principal amount, as well as security of return, within an expected period of time. It also the result of a decision to spend less today so that you will have enough for your future spending needs. Basically every investment possible to be risky, whether it's systematic risk or unsystematic risk, risk could be defined as the difference between actual return and expected return.

Systematic risk are known as non-diversification risk which affected by economic change, politic, social, war, inflation, and international incident that can't be eliminated by diversifying it's portfolio. the following are kinds of systematic risk :

• Market Risk, the risk cause by independent factor from any form of investment. Market risk happen when investment market deviate from it cycle
• Interest Rate Risk, risk due by interest rate fluctuations cause by the quantity of loanable funds in the overall economy and the level of fund's demand and supply
• Reinvestment Rate Risk, as the risk of decreasing market interest rates when the due day since the investment payment being received
• Purchasing Power Risk, also known as inflation risk. Inflation could cut the ability of purchasing
• Currency Risk, must be faced by investor because of fluctuation between two or more currency which affect return of investment

Unsystematic risk are also known as diversify-able risk shown the proportion of investment which could decrease by diversification. It could be affected by management capacity, labor strike, and consumer preferences. the following are kinds of unsystematic risk :

• Business Risk, risk level associated with company ability to operate and make profit. Stable income, normal competition level, and reasonable expenses will made low business risk
• Financial Risk, closely linked to the company's consolidated balance sheet. companies with large debt burdens will have a greater degree of risk as well
• Default Risk,  direct impact of financial risk as a form of the company's inability to pays debt obligations at due day
• Liquidity Risk, associate with uncertainty changing of investment to be cash within a relatively short period for something that can be predicted and in a relatively fixed price

An asset could be illiquid but high ability to sells, because marketability refers to the ability to sell assets quickly without guarantees of fair selling price. Sometime liquid asset didn't even have market. 

Affecting factors to the level of investor risk tolerance :

• Specific Goals, risk tolerance for payment are higher than excess money
• Time Frame, retirement investment could get in to high risk tolerance
• Investment Knowledge, an expert will achieve high tolerance to their-self
• Personality, risk return based on individual personality
• Current Market Conditions, bullish will stimulus investor's psychology
• Current Financial Conditions, low financial condition person will give their-self smaller risk tolerance than they who has high financial condition
• Age, the older people will less courage to be a risk-taker
• Investment Advise, people have tendency to change risk-return rate by expert

Type and Characteristic of Investment Return :

• Capital Appreciation, an investor who focused on growth investment will not really interested to get current income. they will attracting into big growth by early investment in term (short, intermediate, and long term). The longer term of investment reflect saver risk of investment.
• Income distributed into three type (dividend, interest, and rent payments),
• Settle company could doing both of them coincide

Assets Allocation divided into two method, that is Strategic Asset Allocation and Tactical Asset Allocation, Strategic Asset Allocation are allocation method that focused on objectivity long range to fixed the comparison of few asset. In other hand, Tactical Asset Allocation are method that estimate market movements to change the asset composition on portfolio, this method used market timing and sector rotation technique. Market timing involves the placement between two forms of asset based on the estimate market movements. Sector Rotation used to change the portfolio composition from industry to other sectors. At the establishment of a portfolio, we need to pay attention to the correlation between the assets forming portfolio. In order to decrease risk level of portfolio, we could combine or add negative correlation asset, that method called as diversification. Based concept of efficient frontier are combining asset forming composition that will reach maximum portfolio return.

Investment Analysis Method basically summarized into Technical Analysis and Fundamental Analysis. Technical Analysis believe that price establish in market are reflection of bullish and bearish, they who believe in this method will combine with benchmark, transaction volume, statistic indicators, and past movement patterns. Fundamental Analysis deeply evaluate to something such as interest rate, gross national product, inflation, unemployment rate, market stock, micro and macro economy, company's financial statement, etc. From the smaller point of view, fundamental analysis will evaluate financial statement position to predict stock price movement in future or profit prospect which will reach by issuers. There are two approach of fundamental analysis, that is top-down investing and bottom-up investing. Top-down investing try to comprehensive identify economic trend, they will used three basic analysis {economic conditions (business cycle, government financial policy, and fiscal policy), industrial condition, company condition (competitive company position, growth prospect, company financial position)}. Bottom-up investing toward into micro approach who will chase stock companies experiencing selling pressure in stock market.

Intrinsic Value, the basis of securities or investment instrument. A stock could be rated as undervalue if intrinsic value of stock higher than stock-market price, this condition give good prospect to be purchased and kept until market-price come in to intrinsic value. In other hand, if intrinsic value of stock is lower than stock-market price it called as overvalue and the condition possibly will have selling price pressure (market will try to bring it into intrinsic value).





reference : Modul 1 Fundamental of Financial Planning, FPSB Indonesia

It takes as much energy to wish as it does to plan - Eleanor Roosevelt

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