Explain the Various Components of a Target Investment Portfolio (TIP)

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The Answer is The objective of constructing a Target Investment Portfolio (TIP) is to bring about a synthesis between the various competing investment objectives. This goal is achieved by including the right combination of investments in the portfolio. The following is a discussion of the place of various investments in the TIP.
Cash Reserves and Emergency Funds
The starting point of constructing every investment portfolio is to determine the percentage allocation for cash reserves and emergency funds. Every investor should recognize that in a family's financial life unforeseen contingencies will occur which must be successfully met if the catastrophic consequences are to be avoided. In addition, cash reserves provide liquidity to the portfolio which allows the investor to respond to occasional changes in lifestyle and capitalize on emerging investment opportunities. The primary consideration in selecting these assets is safety and liquidity with a clear understanding that the trade-off is a low return.
Income Flow
An important consideration of an investment portfolio especially appropriate for-but not limited to-the preservation stage is the amount of income which it can generate to help maintain the desired lifestyle. Income-oriented investments generally emphasize current income but may sacrifice growth of the principal. Most, though not all, fixed income investments have a fixed maturity date when the principal can be expected to be returned to the investor. These investments appreciate in value during periods of falling interest rates and tend to lose their value during periods of rising interest rates.
An important caveat should be added here. Bonds are usually thought of as the primary vehicle for generating current income. That view is too parochial. There are a number of other reliable investments that are attractive as income generators. These include utility stocks, high-yield stocks, mortgage-backed securities, fixed annuities, master limited partnerships, and real estate investment trusts. Each of them has distinct investment characteristics and provides a valuable tool for income planning.
Growth
Most equity investments offer a potential for appreciation in value but generate relatively limited amounts of cash flow. These investments are subject to market as well as industry-and company-related risks, and can result in losses if the investor is compelled to sell them under adverse market conditions.
Long-term Growth and Tax Savings
The objectives of long-term growth and tax savings are achieved through investments in a variety of vehicles. The main categories of these investments consist of real estate investments, tax-sheltered investments, hard assets, and other miscellaneous investments such as commodities, exploratory oil and gas programs, and race horses.

Explain the Various Components of a Target Investment Portfolio (TIP)

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