Investment Portfolio Planning & Management


Introduction to Investment Planning

What is investment planning?


The investment planning process

If you're fortunate enough to have money left over after paying the costs of living, you may be able to make that extra money go to work for you by investing it to earn a financial return. Investment planning involves deciding how best to put your money--your capital--to work to achieve your financial goals.

First things first; secure a strong financial foundation

Before you begin investing, you need to secure a strong financial foundation. Be sure these basic steps have been taken:

  • Create a "rainy day" reserve: Set aside enough cash to get you through an unexpected period of illness or unemployment--two months' worth of living expenses is generally recommended. Put the cash in a relatively stable and liquid investment that can earn money but still lets you access the funds easily.
  • Pay off your debts: It makes more sense to pay off high-interest-rate debt (e.g., credit card debt) than to put money into investments that involve an uncertain return.
  • Get insured: Having adequate insurance is your best protection against financial loss, so review your home, auto, health, disability, life, and other policies, and increase your coverage, if needed.
  • Max out your IRA, 401(k), Keogh, or other tax-deferred retirement plan: Putting money in these accounts defers income taxes, leaving you more money to put toward your financial goals. Take full advantage of them if they are available to you.

Getting educated

Once you've decided to become an investor, you should "stick your toe in the water" and get a feel for the environment. The investment world is unique and has its own language, resources, markets, and so forth. Don't dive in until you're at least somewhat familiar with this new territory. Here are some ways to do this:

  • Talk directly with a professional financial advisor
  • Talk to other, more experienced investors
  • Do online research--many websites provide glossaries and other educational information
  • Subscribe to financial newspapers and periodicals, or visit a library that has such subscriptions
  • Buy books or software on investing (but select carefully--there are some bad ones out there)

Here are some elementary investment terms and concepts you should know:

  • Time horizon: How long you will remain invested
  • Risk: The probability that you will make or lose money with an investment
  • Risk tolerance: Your capacity to absorb financial loss and your emotional feelings about losing money
  • Investment portfolio: A collection of investments
  • Diversification or asset allocation: Spreading dollars across a variety of investments to try to reduce risk (although diversification alone can't guarantee a profit or ensure against a loss)
  • Liquidity: The ability to quickly convert investments into cash
  • Securities: Generally, stocks, bonds and other investment instruments
  • Index: A group of securities that represent a specific market or segment of a market
  • Exchange: Facility (physical or electronic) for the trading of securities
  • Yield: Generally, the return on an investment
  • Bear market: Occurs when securities are declining in value
  • Bull market: Occurs when securities are rising in value

A six-step process

It may be helpful to think of investment planning as a six-step process:

  1. Setting investment goals
  2. Understanding your investment personality
  3. Designing an investment portfolio
  4. Selecting specific investments
  5. Managing and monitoring the portfolio
  6. Rebalancing or redesigning the portfolio, if needed

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