Page 256 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Unit 9: Portfolio Management

Notes
Investing in Cash
During tough times for stockmarkets, cash investments are usually considered the safest
haven. However, for those cash savers used to earning a rate of interest of 6% plus, cash as
an asset class is starting to look distinctly unappealing.
The Bank of England's has reduced UK interest rates from 5.25% last year to just 1.5%. This
means that savers who put their faith in cash investments will hardly see their money
grow.
Once the taxman has taken a share, and inflation has accounted for the rest, there's strong
possibility that cash investments will give investors no returns at all.

David decided that, with £10,000 to invest, he should invest £7,200 in a 2008 stocks and
shares ISA, investing the whole amount before the 2009 ISA season begins on 6 April 2009.
This meant that David would have to keep £3,000 in his high street instant access account
until after this date, at which point he would look for a Cash ISA with a more competitive
rate of interest.
"Savings rates on cash aren't that impressive at the moment, but my investment will be
covered if my bank goes bust, and sometimes peace of mind is more important than
higher returns", David said.
Investing in Bonds
David decided that with some of his money unavoidably tied up in cash, he wanted the
rest of his portfolio to be able to generate higher consistent returns, by investing in assets
that offered a fixed income, such as government bonds and corporate bonds.
Bonds are known as fixed income assets because they offer investors a consistent stream of
payments (income) as well as the initial investment, returned at the end of the investment
time period.
A bond fund enables investors to purchase units in a fund that invests in various types of
bond. The advantage of this is that the bond fund is easily tradable and the fund manager
can make the best investment decisions on your behalf.
Diversifying between Different Bond Types

Based on his IFA's recommendations, David invested £5,000 in two separate bond funds.
The first fund (£2,000) invested solely in government bonds, the least risky of all investment
types. David felt that given the recent volatility of markets, it made sense to keep a
sensible portion of his portfolio as safe as possible.
David also chose to invest £3,000 in a separate fund invested in high quality investment
grade corporate bonds, issued by some of the best companies in the UK and globally.
At present, corporate bond markets are offering a competitive rate of income, far superior
than available from government bonds. The reason for this is that the risk attached to
investing in companies is still much greater – now more than ever since recent high
profile banks and other companies have gone bust – than investing through government
issued securities.

David said: "sometimes you don't want your investments to be too complicated or risky.
Bonds are boring and safe which, at the moment, suits me down to the ground."

Contd...

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