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Steps in and Process of Investment

The investment process is a systematic approach to investing that involves several key steps designed to optimize the performance of an investment portfolio. Here's a breakdown of these steps:

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Set Investment Policy

  • Adage Insight: "If you don’t know where you are going, any road will do."
  • Purpose: Establishes a strategic plan that guides all investment efforts.
  • Components:
  • Determination of Objectives: Identifying risk and return goals.
  • Investible Wealth: Determining the amount of wealth available for investment.
  • Tax Status: Considering the investor's tax situation.
  • Asset Categories: Identifying potential types of financial assets for investment.

Perform Security Analysis

  • Objective: To examine individual securities to identify those that are mispriced.
  • Methods:
  • Technical Analysis: Analyzing statistical trends from trading activity.
  • Fundamental Analysis: Evaluating a security's intrinsic value through economic and financial factors.

Construction of Portfolio

  • Goal: Achieve diversification to reduce risk. The saying "don't put all your eggs in one basket" captures the essence of this step.
  • Strategy: Selecting a mix of securities to spread out risk and potential return.

Revise the Portfolio

  • Activity: Periodic review and adjustment of the portfolio to align with investment goals, market conditions, or financial situation changes.

Evaluation of the Portfolio Performance

  • Metrics:
  • Transaction Costs: Assessing the costs associated with buying and selling securities.
  • Return Earned: Calculating the profit or loss from the investment.
  • Risk Experienced: Evaluating the volatility and the actual risk taken.
  • Benchmark Setting: Comparing the portfolio's performance against a relevant benchmark.

Each of these steps is crucial for the thoughtful planning and ongoing management of an investment portfolio. This structured approach helps investors make informed decisions, manage risks, and strive for the best possible financial outcomes.

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