Portfolio Valuation – All you need to know

In this article, we will explain the main concepts associated with an investment portfolio and review the most important valuation procedures.

In financial terms, a portfolio is the collective holdings of an investor, consisting of a group of investments such as stocks, bonds, commodities or more. As a fundamental element of finance, valuing and managing portfolios is generally regarded as the main pillars of financial planning. Properly valued and managed portfolios, especially in the long term, can be a key contributor to overall wealth and financial security. The term portfolio valuation refers to the process of estimating the true value of a portfolio, either for the purpose of selling and transferring its ownership or for managing the assets. In this article, we will explain the main concepts associated with an investment portfolio and review the most important valuation procedures.

Investment portfolio and its valuation

In its most basic form, an investment portfolio can be defined as a collection of individual issued securities, such as stocks, bonds and other financial instruments, which are pooled together for the purpose of obtaining a certain level of gains and profits. In order to achieve desired returns and benefits, it is necessary to analyze the probabilities of the potential outcomes and calculate their corresponding true values.

This can be done by performing a complete analysis and valuation of all the individual securities in the portfolio, as well as by implementing various mathematical methods. In this regard, portfolio valuation is considered to be an essential element of financial planning, which is widely used by many individual investors, as well as by institutional and professional asset management companies.

What is an investment portfolio?

Basically, an investment portfolio is a set of investments that are owned by an individual, a corporation or an organization. In a more practical sense, it can be defined as a group of securities that are owned by a particular investor. The diversity of the potential financial investments takes place because of multiple factors such as the investor’s risk profile, tolerance, current financial situation, future goals, available resources, investing style and timing of the transactions.

All of these elements have a crucial effect on the selection of the considered investments and on the investor’s ability to identify successful and profitable investment opportunities. In general, the more diversified the portfolio is, the more effective it is in minimizing the impact of any single investment’s risk. However, the only way to achieve effective diversification is by properly analyzing and valuing each security individually.

What does the portfolio include?

An investment portfolio typically includes many different types of investments such as stocks, bonds, mutual funds, ETFs, commodities, or other financial instruments. Within this group, the selection of securities depends on both the available investment strategies and the intended type of diversification. Here are some of the most common types of investments:

Bonds – Bonds function as a debt instrument, which means that they represent a loan with an interest rate and duration. Bonds are issued by governments, municipalities and private companies with the purpose of raising money for specific projects. It is relatively straightforward to value bonds because of their common and their liquid nature. In addition to this, bonds have a fairly stable price, which means that their values are not as volatile as the prices of other investments.
Stocks – Stocks are another type of security that represents ownership in a corporation and comes with possible dividends. Although it is usually riskier than bonds, stocks can generate higher returns. The price of the stock is influenced by the company’s performance, market trends, changes in supply and demand, as well as various other factors. They are the most common type of investment and are used by both individual investors and professionals.
Alternative investments – Alternative investments refers to investing in any asset class other than stocks, bonds or cash. There are many types of alternative investments, such as hedge funds, private equity, real estate, and commodities. While these instruments may be riskier, however, they provide higher returns and better diversification.

Types of an investment portfolio

Depending on the purpose of the investor, an investment portfolio can be classified into three different types, which are illustrated as follows:

Income Portfolio – This type of portfolio consists of only investments that are intended to generate income. In this sense, a constant flow of income is one of the main goals of the investor rather than focusing on long-term capital gains. As such, they are income-driven investments purely focused on income.
Growth Portfolio – The growth portfolio is designed to achieve long-term capital gains and growth in the value of the assets. Investing in high-growth assets is a primary consideration in this case. These types of assets often require substantial risk in order to produce sufficient gains.
Value Portfolio – In case the investor is interested in buying assets which are undervalued and selling them when they become overvalued, they usually create a value portfolio. The main purpose of a value portfolio is to generate capital gains and appreciation, which results in a significant increase in the value of the entire portfolio.

How to build an investment portfolio

In order to properly create an effective investment portfolio, it is necessary to have a comprehensive and accurate knowledge of the market. From asset allocation and asset selection to risk management and reallocation, everything should be thoroughly studied and analyzed. There is no one-size-fits-all approach due to the varying risk profiles, tolerance, financial situation and the different investment objectives of each investor.

The main goal is to carefully process the information regarding the market and its specific changes to minimize losses and maximize returns. Therefore, it is necessary to tailor your portfolio as per your strategies, analysis, goals, knowledge and experience. What is portfolio valuation?

Investment portfolio valuation

When it comes to the value of an investment portfolio, the main objective is to determine the value of each asset owned by the investor, thereby providing a total asset value for all of the holdings. The calculation of the total value of an investment portfolio takes into account the mathematical analysis of each security. Portfolio valuation is important because it allows the investor to make well-informed investment decisions, manage their resources and adjust the portfolio when needed.

How does portfolio valuation work?

The process of portfolio valuation is carried out by calculating the value of each asset class in the investment portfolio as well as the total portfolio value. The value of each asset is verified by analyzing the total performance, market trends and other factors. In this regard, valuation for financial securities such as stocks and bonds is straightforward, as the price of these assets is fairly available and can be verified easily.

However, for assets such as real estate, equipment or other hard-to-value assets, the calculation of the value involves an extensive process of analysis and research. It is important to note that the most suitable method of portfolio valuation can vary depending on the specific investment.

When do you need portfolio valuation?

Effective portfolio valuation is vital for all investors, especially those with a short-term objective. This is because it allows for the proper management of one’s resources, as well as the assessment of the overall returns and risks. The accurate valuation of your portfolio allows you to make better investments, adjust your holdings according to the market conditions and take advantage of the opportunities that arise.
It is also important in terms of accounting, specifically for the reporting of profits and losses, as well as for the preparation of tax returns. As a result, regular portfolio valuation is recommended for all investors, whether they are amateur investors, experienced traders, or professional financial analysts.

Rules and regulations for portfolio valuation

In order to properly value your portfolio, it is important to consider the set of rules and regulations that have been established by financial authorities and regulators. These regulatory requirements help protect investors as well as prevent fraudulent practices in the financial world. Generally Accepted Accounting Principles (GAAP) are the most widely accepted accounting standards which stipulate that GAAP and standards must be strictly followed.

While Securities Exchange Commission (SEC) regulations provide the necessary steps to be followed when valuing security, various acts, including The Private Fund Investment Advisers Registration Act, Dodd-Frank Amendments to Investment Advisers Act, and SEC Enforcement Division’s Asset Management Unit, were passed to regulate the financial industry and protect investors.

Why is it important to value portfolios for liquid assets?

When it comes to liquid assets, it is even more important to value the portfolio because this type of investment often consists of assets that are easy to convert into cash. As per GAAP, ensuring the integrity of the financial statements is crucial as it can help investors expose inefficient managers and gain more confidence in the overall financial system. In addition to this, in-house valuation results in conflicts of interest, where the analysts may have a personal interest in the outcome of the valuation.

How to value an investment portfolio?

Now that the concept and the importance of portfolio valuation have been explained, the next logical step is to know how to value an investment portfolio. There are several valuation techniques that can be applied according to your specific needs, but it is always recommended to choose the one which best suits your circumstances and requirements. So, how to calculate portfolio valuation?

Methods to value your portfolio

There are three main portfolio valuation methods that can be used to determine the value of your investment portfolio:

Market Approach – This is the most common approach to a portfolio valuation, as it provides an estimate of the value of a security by looking at its market price. Market prices are compared with the ask/bid prices at the time of evaluating the portfolio.
Income Approach – In this approach, the present value of expected future cash flows is calculated by discounting those expected future cash flows at an appropriate rate (discount rate). Typically, asset, debt, or derivative positions will be valued using the income approach.
Asset Approach – With the asset approach, the value of a fund’s assets, when subtracted from the value of its liabilities, is used as the portfolio value. Basically, the asset approach is used to value assets that have tangible assets such as real estate or equipment.

How do DLOC and DLOM work in portfolio valuation?

Discount for Lack of Control (DLOC) and Discount for Lack of Marketability (DLOM) are two valuation methods that can be used to value an investment portfolio. In DLOC, investors in capital markets generally pay a premium for control rights and thereby demand discounts for lack of control. On the other hand, in DLOM, the minority interests in private companies are often difficult to sell, wherein the interest in a closely held business is worthless. Therefore, this valuation method requires a discount for lack of marketability.

Why choose Eqvista for your portfolio valuation?

In conclusion, portfolio valuation is a crucial procedure that must be followed by investors in order to make well-informed investment decisions and reduce risk. Effective portfolio valuation also helps prepare accurate financial statements and improves overall transparency. Are you looking for an easy way to value your portfolio? At Eqvista, they offer a solution that allows you to value your portfolio in a simple and efficient manner. With experts and professionals, Eqvista can help you determine the value of your investment portfolio.

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