INVESTMENT MANAGEMENT HOW TO MANAGE YOURS INVESTMENTS PROPERLY
Investment management is a complete science and if you are expecting to become a professional investment manager in few hours you should get disappointed. However, there are several most important guidelines at investment management process:
Understanding the Needs of an Investor
The most important thing is that investment management strategy would fit exact investor and fulfill his needs. As all the people are very different, investment goals are also widely diverse. If some investors seek for safety, others would try to get as fast result as possible and are ready for all kind of speculations.
If investor is beginner, he might understand risk tolerance of his own not properly. That means he can believe that he can lose invested money during market rise, but when it happens he will blame everyone but not himself for wrongly chosen risk level.
Others are investing for a particular task or period that also shapes investment strategy. Whatever are the needs and goals of investor it must be the background for whole investment management.
Asset allocation has a critical impact for investment results. Asset allocation means distribution of different assets classes in the portfolio. The main financial investments are stocks, bonds, commodities and derivatives. Every of it has various risk and return level, so the combination of asset classes must meet before mentioned investors’ needs. The better diversification between asset classes is the better risk-return ratio should be achieved.
Generally market timing means changes in asset allocation during economical cycles. For example, if an investor believes that stock market will decrease, he sells owned equities and buys some bonds instead. Some believe in market timing, while others say that the market is efficient and is not possible to achieve better results implementing market timing over long run.
Picking of the securities is not necessary for every portfolio. The most of the private investment portfolios managers are avoiding this step and invest only in funds (traditional or exchange traded). It is not necessary bad if investment portfolio consisted of funds isn’t very large and those investment funds are low cost (read about ‘total expense ratio’).
If investment manager decides to invest in securities directly – he takes a big job on himself. To pick securities properly you need to analyze many companies until you can choose the best ones. The main methods for stock picking are relative valuation and DCF valuation. It is a lot of work to pick best stocks, but it isn’t the end of the job yet. After that, manager must cover these companies: analyze news and results, revaluate stock consistently and wait for the best time to sell it. Then he needs to look after new and more attractive security.
Even an investor already knows what investments exactly need to acquire there is left some job to proceed it correctly. If the chosen securities are trading at lower liquidity then careless trading execution may create additional costs. There are different investment techniques how to make this execution more effective.
They say that good investment manager is the one who beats the market. But what exactly means ‘beat the market’ and how to measure results of investment management?
Read here if you want to know how to measure investment performance?