Wealth Management: Investment Plan

Table of Contents

1.0 Introduction

0 Asset Allocation

2.1 Portfolio Size

2.2 Portfolio Composition

2.2.1 Physical Assets

2.2.1.1. Real Estate

2.2.1.2. Land

2.2.1.3 Transportation

2.2 .2 Financial Assets

2.2.2.1 Equity

2.2.2.2 Banking Instruments

2.2.3 Commodities

1.2.3.1. Construction Materials

3.0 Investment Strategy

4.0 Risk Attitude

5.0 Diversification

5.1 Sector/Industry Diversification

5.2 Geography/Marker Diversification

6.0 Conclusion

7.0 References

1.0 INTRODUCTION

Investment is one thing that should be done with a high level of caution. This is because it involves money and if an investor is not careful, the money may be lost in the process. Having known this requires proper preparation and planning, I had to be very keen on the initial stages of planning on my investment. This is because with all the important things good taken care of; my investment would end up successful. So as to make it better, I realised it is important to come up with a proper investment plan. The plan is able to show the areas which I am going to put the hard earned money in. The investment plan should be able to show the various asset classes I am investing in. The investment plan will also show how the investment will be diversified. The investment plan will also show what I want to achieve over a given period of time. The portfolio investment plan should be able to take into consideration the ranging risk tolerances, liquidity needs and investment time periods that I have in mind.

With a value of £2,000, 000, I am confident that I can be able to do a lot with the money. This would allow proper investment portfolio components that are able to give good returns over the investment period. So that I may spend the money wisely, I decided to invest it as follows;

0 ASSET ALLOCATION

2.1 PORTFOLIO SIZE

The £2,000,000 will be committed to a portfolio of 6 assets. This is done with an aim of ensuring that the money of the investor is not put in one or few investment areas where the risk would be high. Secondly, I chose 6 components f my portfolio so as to ensure that I put a reasonable amount of money in each one of them. It is always advisable to have a substantial amount of money in an investment so as to realise meaningful amount of return. It is not wise to have a wide range of investment size whose components have immaterial returns.

2.2 PORTFOLIO COMPOSITION

2.2.1 PHYSICAL ASSETS

2.2.1.1. REAL ESTATE

Real estate is one of the sectors where returns are good. Nowadays, the returns and growth seen in the real estate sector has been tremendous. For example in the UK, the number of housing planning approvals has gone high by one third. According to the financial times news, the number of the approvals has hit 167,000 cases which is good. This means that putting good money in real estate assets is not a bad idea. From the £2,000,000 value for investment, the real estate part of the portfolio will consume 20%. This amounts to £400,000.

I put £400,000 in real estate since it is one of the areas which I expect to get more money. This is the largest part of my investment. Real Estate Investors Plc is the company I chose in real estate. As indicated by the graph below, the company’s prices have been moving up interestingly.

Prices

Month

Below are more of the company’s details which encouraged me to invest in it.

Key Fundamentals	31-Dec-12	31-Dec-11	31-Dec-10	31-Dec-09	31-Dec-08
Revenue (£ m)	6.12	4.9	4.02	3.24	3.01
Pre-Tax (£ m)	1	-6.69	-5.59	4.35	-15.67
EPS	0.51p	-8.66p	-1.01p	0.91p	-3.25p
PE	83.33	-6.18	-5.45	6.73	-1.27
PEG	-0.79	-0.01	0.03	-0.05	0
EPS Growth	-105.89%	757.43%	-210.99%	-128.00%	-1002.78%
Dividend Cover	1.02	n/a	n/a	n/a	n/a
Dividend Yield	1.18%	0.00%	0.00%	0.00%	0.00%

The company’s Price Earnings seem to have increased at a very high rate from -6.18 to 83.33 in the year 2013. The revenue also shows a consistent increase over the years. The Earnings per share also shows an increase over the years.

http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-summary.html?fourWayKey=GB00B45XLP34GBGBXAIM

The real estate industry is known to be affected very much by inflation effects. This is means that in case inflation takes place, my investment in the real estate area may not give me the expected returns. Additionally, real estate interests are usually affected by changing preferences of consumers. This may leave some properties held for sale not transacted upon. However, my plan to put my money in real estate had to go on because on good days the returns are usually handsome. Additionally, instances of inflation and changing preferences of customers are rare.

2.2.1.2. LAND

Land is one thing that has been getting increase in prices. The price of pieces of land has been increasing at a good rate over time. This means that going for an investment in this area would be very beneficial. To be able to get into the land business, 15 percent of the total amount available for investment will be utilized. This makes £300,000 of the total money available.

I allocated £300,000 to this area since it does not bring returns quickly since could not put the largest share of my money in this area. City Developments Limited is the company that I identified to have my investment in. This company has been performing well over the recent times.

For example, looking at the 10 year analysis below, it is evident that the company is good choice for investment. The revenue and profit before tax has been increasing.

Year	2003	2004⁽³⁾	2005	2006	2007

Revenue	$2,326m	$2,380m	$2,374m	$2,547m	$3,106m
Profit before tax	$214m	$503m	$404m	$692m	$955m
Profit for the year attributable to owners of the Company	$152m	$227m	$200m	$352m	$725m
Net gearing ratio	0.64	0.55	0.5	0.4	0.48
Return on equity	3.30%	5.20%	4.40%	7.40%	13.90%
Net asset value per share	$5.56	$4.99	$5.12	$5.21	$5.72
Basic earnings per share	18.8 cents	25.3 cents	20.8 cents	37.0 cents	78.3 cents

Year	2008	2009	2010⁽³⁾	2011	2012

Revenue	$2,945m	$3,273m	$3,103m	$3,280m	$3,354m
Profit before tax	$834m	$832m	$1,067m	$1,136m	$960m
Profit for the year attributable to owners of the Company	$581m	$593m	$784m	$799m	$678m
Net gearing ratio	0.48	0.4	0.29	0.21	0.25
Return on equity	10.70%	9.90%	12.50%	11.70%	9.30%
Net asset value per share	$5.97	$6.57	$6.89	$7.51	$8.03
Basic earnings per share	62.5 cents	63.8 cents	84.8 cents	86.4 cents	73.2 cen

http://media.corporate-ir.net/media_files/IROL/60/60774/cdl_AR_microsite_2012/CDL_AR_2012_Final_with_M_C/10year_financial.html

One of the challenges that arise as a result of investing in land is that sometimes it ties capital for long. Sometimes the land held for sale may not find a buyer within a short period. This may keep me waiting returns from this sector. Even though there is this drawback, I had to go ahead with the investment since I was sure that the money would not be lost and the land will keep on appreciating as I wait for the returns.

2.2.1.3 TRANSPORTATION

The fact that nothing happens unless movement takes place should be a factor to consider while investing. Therefore, it is important to consider putting some money in the transport business. This means with proper diversification of this component of investment, then the profits from the industry would be handsome. To operate in this area, £400,000 of the total amount available would be used.

Aeroflot is the company I chose to invest in the transportation sector. The company has performed well in the recent times to be noticed by investors. As at December 2^nd, the quarterly profit went up by 88% to $543.7 million, while the revenue rose to$ 2.9 billion from $2.4 billion last year.

http://www.reuters.com/article/2013/12/02/russia-aeroflot-idUSL2N0JH07N20131202

http://www.aeroflot.ru/cms/en/reports_item/502

I allocated the £400,000 to this area since I find it one of the most reliable areas. Additionally, I wanted to target 30% return from this industry which would be £120,000, being a good amount for me.

One challenge of investing in transportation is that the diversification in this area is not high. Transportation does not allow some one to diversify thus making the returns increase or decrease according to the level of activities in the market. With this in mind, I had to go ahead with the investment since transportation is one area where business activities will never end. This is because life is about movement of people, goods and services thus the need to be confident.

2.2 .2 FINANCIAL ASSETS

2.2.2.1 EQUITY

Worldwide, the purchase of shares of companies which are performing well in the market is very common. Therefore, investing in some shares of well performing companies in the market is a brilliant idea. £300,000 would be committed in shares of companies which have been performing well over the past three years. I chose Annaly Capital Management Inc. for my investment in equity. From the extract of the income statement below, the revenue has dropped in the year 2011 to 1,120,042 from 1,899,841. This changed when the revenue of the company increased to 2,674,543 in the year 2012. The net income experienced the same changes over the three years. This shows that the company is good for investment.

2012	2011	2010
Total Revenue		2,674,543	1,120,042	1,899,841
Cost of Revenue		–	–	–

Gross Profit		–	–	–
Operating Expenses
Research Development	–	–	–
Selling General and Administrative	235,559	237,344	171,847

Operating Income or Loss		–	–	–
Income from Continuing Operations
Total Other Income/Expenses Net	–	–	–
Earnings Before Interest And Taxes	2,438,984	882,698	1,727,994
Interest Expense	667,172	480,326	428,225
Income Before Tax	1,771,812	402,372	1,299,769
Income Tax Expense	35,912	59,051	35,434
Minority Interest	–	–	–
Net Income From Continuing Ops	1,735,900	344,461	1,267,280


Net Income		1,735,900	344,461	1,267,280
Preferred Stock And Other Adjustments		-39,530	-16,854	-18,033

Net Income Applicable To Common Shares		1,696,370	327,607	1,249,247

http://finance.yahoo.com/q/is?s=NLY+Income+Statement&annual

The investment in equity faces challenges of drops in share prices and also the occurrence of liquidation which takes away shareholders’ investments. However, I had to make the investment since these occurrences are not common. This means that I can take the little risk involved bearing in mind that I am risk neutral.

2.2.2.2 BANKING INSTRUMENTS

The nature of business in the banking industry is stable enough to attract investors. Therefore it is important to have some money allocated to the banking instruments. From the £2,000,000 value for investment, £300,000 will be put in the banking instruments.

To make my investment in the banking industry smart, I had to go for the bank instruments with Barclays bank. First I was impressed by the asset base of the bank which stands at US$2.42 trillion making it the 6^th largest in the world. This means that my investment will be in safe hands. I invested £300,000 only since the returns from bank instruments are very little compared to the other components of my portfolio.

Looking at the prices of the banks shares for the past 1 year, it is evident that the prices increased slightly and then took a stable position. This is encouraging for investment since it indicates that no turbulence is able to destabilize the company. The company seems to have paid dividends too.

Dec 2, 2013	24.41	24.41	24.09	24.15	52,000	24.15
Nov 26, 2013	0.414 Dividend
Nov 1, 2013	24.55	24.80	24.24	24.29	44,000	24.29
Oct 1, 2013	24.44	24.88	24.28	24.60	43,900	24.19
Sep 3, 2013	24.46	24.63	24.28	24.43	54,100	24.02
Aug 28, 2013	0.414 Dividend
Aug 1, 2013	24.65	24.90	23.70	24.30	59,600	23.89
Jul 1, 2013	24.80	25.06	24.30	24.72	55,000	23.89
Jun 3, 2013	25.15	25.32	23.75	24.71	72,400	23.88
May 29, 2013	0.414 Dividend
May 1, 2013	25.49	25.88	25.00	25.00	53,100	24.16
Apr 1, 2013	25.61	25.65	25.24	25.46	41,200	24.21
Mar 1, 2013	25.20	25.61	25.16	25.52	45,500	24.27
Feb 27, 2013	0.414 Dividend
Feb 1, 2013	25.19	26.19	25.15	25.19	37,200	23.95
Jan 2, 2013	25.04	25.48	25.00	25.16	38,400	23.54
Dec 3, 2012	24.86	25.30	24.02	25.00	51,100	23.39
Nov 28, 2012	0.414 Dividend
Nov 1, 2012	25.09	25.39	24.83	24.90	45,700	23.30

http://finance.yahoo.com/q/hp?s=BCS-P&a=10&b=24&c=2010&d=11&e=7&f=2013&g=m

One drawback associated with bank instruments is that they offer little rate of return compared to shares and other investments. However, the returns are usually guaranteed and well managed. Additionally, it is my opinion that the banking industry is growing at a fast rate thus giving hope that the returns may get better thus the need to invest in them despite the drawbacks.

2.2.3 COMMODITIES

1.2.3.1. CONSTRUCTION MATERIALS

Since the company is involved in the real estate business, it is important to put money in the construction materials by allocating £300,000. This will be a good decision since each investment will support each other in its business. The real estate business requires construction materials while the construction materials business requires the real estate industry for prosperity. This means that the investment in the construction materials sector will be very brilliant.

I had to go for Tata steel in my investment in this area. This is because the company has performed well recently having made £500,000,000 on its entry into the London stock exchange. This is one of the companies with investor interest. I invested £300,000 only since it is a new member in the London stock exchange.

http://www.tatasteel.com/investors/annual-report-2012-13/tata%20steel%20annual%20report%202012-2013/assets/basic-html/page95.html

Looking at the analysis below, the position of the company is fair. The positive EBITDA, EBITDA Margin, profit before tax and EBITDA/ Tonne are sufficient enough for me to invest.

Tata Steel Group
Deliveries (Mn T)	6.07
Turnover	34,133
EBITDA	2,453
EBITDA Margin (%)	7%
EBITDA/tonne (Rs.)	4,043
Profit Before Tax	1,398
Profit After Tax, Minority Interest and Associates’ Income *	-364

One drawback of investing in construction materials is that there is a high level of competition in the sector. This means that if efficiency is not created, it would be hard to make it in the sector. However, I had to go ahead with the investment since there is a good investment strategy. Additionally, the fact that there are investments in dependent areas such as real estate makes it wise to invest in the construction materials area.

3.0 INVESTMENT STRATEGY

Strategy is one thing that everyone should learn about since it is very useful in investment decisions. This is because it helps in defining the way things are to be done so as to achieve the highest level of results. According to Johnson, Whittington and Scholes (2011), strategy is usually a way through which the set goals are supposed to be attained. So that I may be able to achieve my investment goals, I had to come up with an investment strategy. To ensure that I get it right, I had to incorporate all the aspects of my intended investment portfolio components. This was aimed at ensuring that every bit of my investment is well taken care of.

To be able to achieve my investment goals, I had to create a group of strategies capable of driving my investment agenda forward. One of the strategies I have decided to rely upon is the sector strategy. This strategy is aimed at ensuring that the returns from an investment component adjusts according to the nature of a given business environment. For example, in the transportation industry, the holdings are all tied in this industry, thus diversification is very narrow within it. This means that if there is booming business in the industry, the value of investments in the industry will go high while whenever the business activities are less the prices of the holdings will drop at the same rate. This strategy will be very useful in ensuring that my investment in each sector or industry is well analysed and taken care of.

Secondly, to make m investment strategy stronger, I had to consider using the stable value strategy. This strategy is known to be conservative in nature. It is known to be very good in ensuring that an investor does not lose part of his or her money. Therefore I had to incorporate this strategy so as to make sure that some of my investment remains intact in case things go wrong. I applied this strategy in the choice of the land component of my investment portfolio. With land, whenever the economic factors change negatively, the prices will be less affected. Land is known to have a stable aspect in its value and price in times of economic hardships (Wetherly & Otter, 2008). This means that I will experience a stable situation in my land investment. Additionally, with negative movements in the countries interests’ rates, the effects on prices will not be felt as a result of relying on the stable value strategy in choosing part of my portfolio investment components. This will be able to give be the much needed strong backbone whenever the economic factors do not favour the other components of my investment.

4.0 RISK ATTITUDE

Generally when going for investment ventures, it is always important to understand that risk is involved. This is because every area of investment has a given level of risk. I found it important to take a specific stand regarding the type of approach that I would exhibit as I go for the investment. My risk approach is neutral to attitude. This means that I am not afraid to meet risk in the investment, nor am I ready to sacrifice too much so as to go for a given amount of return. This means that I will not go ahead with parting with a given sum of money to have the risk shifted to another person nor am I going to involve myself in an investment which has a high level of risk.

As an investor, I have settled for this attitude since it does not threaten the existence of my investment portfolio. This is because on one side, the attitude does not let me enter into high risk investments which might leave me broke and it does not put the company at a level of risk averseness thus reducing the probability of reasonable profits. This will ensure that I stay in business for the investment period that I have planned about. It will also ensure that I receive a certain level of returns from the investments in the various components of my investment portfolio.

Moreover, the decision to go into the stock exchange market was brilliant. This was motivated by my interest in seeing the shares of the companies that I have invested in go up the stock exchange rating. I have been looking at the rate the shares of those companies have been moving in the stock exchange and wished that one day I get a chance to own some of them. I value stock exchange as one of the places where an individual is able to make money without too much sweat. This is because there are many people who are waiting to benefit from the profit that you make from the shares which are trading in the stock exchange market. This is important since the share which I own in the listed companies will be able to gain thus giving returns to me.

Lastly, I felt Going into the construction sector through the supply of construction materials will give me the opportunity to gain from the fact that people are more interested in having their own homes nowadays. This means that the construction activities in the country will be more than before. This means that the requirement of construction materials will be higher than before, thus being a sector payer will end up benefiting me.

5.0 DIVERSIFICATION

So as to be able to succeed in portfolio investment, it is important to diversify. Thus s usually motivated by the old saying that you should not put all your hope in one basket. Diversification is very important since it carries a certain aspect of stability. Diversification takes many forms;

5.1 SECTOR/INDUSTRY DIVERSIFICATION

So as to ensure that I am safe in my investment, I had to do a good diversification. This was motivated by the fact that different industries have different levels of risk. I also wanted to be able to gain from the different levels of profit available in each of the industries. The real estate has proved to be quite immune to risky fluctuations. Except for the recently deep recession, the industry has never experienced any risky occurrences. This has been able to make the industry one of the most stable and attractive industries for people to invest in. In an effort to benefit too, I had to put £400,000 in the industry.

Secondly, for the purposes of diversification, I had to go for land as a component of my portfolio. Even though this component is related in a way with real estate, they have a difference in the fact that land never depreciates. This means that the value of the land that is dealt with will never fail to go up. This means that I will be able to gain from the investment in land for a long time. This is one component of my investment portfolio that I feel will guarantee infinite returns.

Additionally, I had to go for the banking industry. This is through purchase of some bank instruments. This was necessary since banks are known to manage their business in an efficient way. Secondly, the instruments are managed and supported by more interesting products which contribute towards the returns of such instruments.

5.2 GEOGRAPHY/MARKER DIVERSIFICATION

According to Johnson, Whittington and Scholes (2011), making a geographical consideration during investment planning is very essential. This is because it enables n investor to balance the returns and potentials of different geographical areas. Therefore, I made this consideration while making a composition of my portfolio. This was aimed at ensuring that my investments are able to gain from the capabilities of different states in the country. It is common knowledge that the business environments in the different states are not able to generate the same level of returns. This is a major factor to consider when planning on investment. Secondly, it was important to consider the external factors which affect the industries and sectors that I wanted to invest in. This was necessary in the process of choosing the areas that I would invest in.

5.3 TYPE DIVERSIFICATION

5.3.1 RISK/RETURN PROFILE DIVERSIFICATION

In the physical assets, I had to make sure that I look at the Risk and return profiles. My assets in the physical components of the portfolio investment were arrived at after looking at their risk and return aspect. For example, real estate has a high return but has a history of falling into challenges more than land. Sometimes land may take too long to trade but the risk involved is very low. This makes the physical assets component of my portfolio investment quite stable. This is able to give me the required base for relying on this component for a smooth investment experience.

It means that during the period when the land business will be static, I will be comfortable receiving returns from the other real estate interests. This means that I will not feel the pinch of poor business situation in the land investment. On the other hand, if things go wrong in the other real estate interests, I will not feel the pinch since my land investment will be intact and appreciating. According to Fama (1976), it is always important to come up with a portfolio with combination of components that back each other. As mentioned earlier, it is important to note that land is one thing that never loses value. It is known to be a good option for all investors when they want to have their capital in a safe place.

6.0 CONCLUSION

Everyone should think of getting into an investment. According to Jones and Hill (2009), with wise moves in the investments, there will be returns. From my investment in the six components of my portfolio, I am confident of receiving handsome returns. It is important to note that I had to plan properly so as to be sure about what I was going into. My attitude towards risk is very progressive. This is because it will be able to protect me from ending up broke. Additionally, I will be able to benefit from some risky transactions since I am not risk avert. It is worth noting that the transactions which have the highest levels of risk are usually the most beneficial. However I had to be risk neutral since I do not have too much money with me. This will give me the opportunity to use the currently available money to build a strong investment foundation. With a strong reliable investment base, I will be able to engage in investments which have a high level of risk. This will be possible since the strong investment base will be able to cushion me from the effects of a fall in some of the risky ventures invested in. Interestingly, not all risky investments fail, thus giving me confidence that I will end up gaining.

Additionally, the presence of a strong investment strategy, I am confident of ending up triumphant. This is because the strategy has enabled me come up with a solid investment portfolio whose chances of giving me high returns are high. This makes it possible for me to concentrate on growing my investment more. The level of diversification that I have adopted is very good. Diversification is one strategic move that makes an investor succeed (Thompson, Strickland & Gamble, 2010). It will enable me get returns from the various areas invested in. The failures of one component of my investment will be covered by the possible positive returns of the other. The selection of the components of my portfolio investment was also motivated by the dependency in each other. For example, the synergy in the land, real estate and construction materials investments is impressive. It will ensure that each of these components sails through due to the support from the others.

References

Fama, F. (1976). Foundations of Finance: Portfolio Decisions and Securities Prices, Basic Books, New York.

Johnson, G., Whittington, R. & Scholes, K. (2011). Exploring corporate strategy, 9th ed., Harlow: Pearson Education Limited.

Jones, G. & Hill, W. (2009). Strategic Management Essentials. 2nd ed. Southwestern: Cengage Learning.

Thompson, A., Strickland, J. & Gamble, E. (2010). Crafting and executing strategy: the quest for competitive advantage – concepts and cases. London: McGraw-Hill.

Wetherly, P. & Otter, D. (2008), The business environment. Oxford: Oxford University Press.

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