Investors assume risks in an attempt to have a higher return on their investment. Bank certificates of deposits or CD and Treasury bills are as close to a risk free environment as possible. The problem with these investments is that they do not keep up with inflation.
Market risk is based on changes in the equity or debt markets to affect the investment. This fluctuation can change the price of equity and debt investments, Credit risk is usually associated with income producing securities like bonds. Credit risk also involves the ability of governments, corporations and individuals to repay the money loaned to the obligation.
To reduce these risks; an investor can choose high quality securities to deal with credit risk. For example, a financial analyst can analyze a company to see if they have the cash flow and profits to repay the debt on a bond.
You need common sense, reasonable expectations, patience, discipline, soft hands, and an oversized driver. The K. I. S. S. Principle needs to be at the foundation of your Investment Plan; an emphasis on Working Capital will help you Organize, and Control your investment portfolio.
There is a way to design a portfolio where you do not need a financial manager or adviser. This can be done without too much trouble by using what is called Asset Allocation. This can be done by a layperson or you can use low cost investment software. Asset Allocation is designed to let people allocate their investments among different classes.
The idea around Asset Allocation is to allocate the investor's funds amongst a group of asset classes. Each asset class reacts differently in each economic cycle. We will return to this is a minute but let's talk about each asset class that makes up Asset Allocation.
First deduct any guaranteed pension income from your retirement income goal to estimate the amount needed just from the investment portfolio. Don't worry about inflation at this stage. Next, determine the total Market Value of your investment portfolios, including company plans, IRAs, H-Bonds... everything, except the house, boat, jewelry, etc. Liquid personal and retirement plan assets only.
The sub classes can include short-term or long-term bonds. Each asset class reacts differently based upon where the economy is during the economic cycle. For example, stock or equities do well during periods of economic expansion. Bonds do better during periods of economic contraction. Gold and precious metals do well during periods of inflation or when the national currency is being devalued.
Organizing the Portfolio involves deciding upon an appropriate Asset Allocation... and that requires some discussion. Asset Allocation is the most important and most frequently misunderstood concept in the investment lexicon. The most basic of the confusions is the idea that diversification and Asset Allocation are one and the same. Asset Allocation divides the investment portfolio into the two basic classes of investment securities: Stocks/Equities and Bonds/Income Securities. Most Investment Grade securities fit comfortably into one of these two classes.
Diversification is a risk reduction technique that strictly controls the size of individual holdings as a percent of total assets. A second misconception describes Asset Allocation as a sophisticated technique used to soften the bottom line impact of movements in stock and bond prices, and/or a process that automatically (and foolishly) moves investment dollars from a weakening asset classification to a stronger one... a subtle "market timing" device.
Let's say a person has 55% bonds, 45% stocks and 5% gold or precious metals. Each year they might want to "reallocate" their portfolio to readjust the allocations. For example, let's say bonds did well and they are not 65% of the portfolio. The investor during one day a year, would sell bonds and reallocate the money to stocks to get back to the 55/45/4 allocation.
Each year the person would want to reallocate their portfolio to insure the proper allocation. So if the 65 year old had a good year in bonds and was up to 75% of their allocation, they would
sell off 10% and reallocate their other asset classes by buying more stock. The nice thing about this re-balancing or reallocation is the investor sells high and buys low when reallocating.
Market risk is based on changes in the equity or debt markets to affect the investment. This fluctuation can change the price of equity and debt investments, Credit risk is usually associated with income producing securities like bonds. Credit risk also involves the ability of governments, corporations and individuals to repay the money loaned to the obligation.
To reduce these risks; an investor can choose high quality securities to deal with credit risk. For example, a financial analyst can analyze a company to see if they have the cash flow and profits to repay the debt on a bond.
You need common sense, reasonable expectations, patience, discipline, soft hands, and an oversized driver. The K. I. S. S. Principle needs to be at the foundation of your Investment Plan; an emphasis on Working Capital will help you Organize, and Control your investment portfolio.
There is a way to design a portfolio where you do not need a financial manager or adviser. This can be done without too much trouble by using what is called Asset Allocation. This can be done by a layperson or you can use low cost investment software. Asset Allocation is designed to let people allocate their investments among different classes.
The idea around Asset Allocation is to allocate the investor's funds amongst a group of asset classes. Each asset class reacts differently in each economic cycle. We will return to this is a minute but let's talk about each asset class that makes up Asset Allocation.
First deduct any guaranteed pension income from your retirement income goal to estimate the amount needed just from the investment portfolio. Don't worry about inflation at this stage. Next, determine the total Market Value of your investment portfolios, including company plans, IRAs, H-Bonds... everything, except the house, boat, jewelry, etc. Liquid personal and retirement plan assets only.
The sub classes can include short-term or long-term bonds. Each asset class reacts differently based upon where the economy is during the economic cycle. For example, stock or equities do well during periods of economic expansion. Bonds do better during periods of economic contraction. Gold and precious metals do well during periods of inflation or when the national currency is being devalued.
Organizing the Portfolio involves deciding upon an appropriate Asset Allocation... and that requires some discussion. Asset Allocation is the most important and most frequently misunderstood concept in the investment lexicon. The most basic of the confusions is the idea that diversification and Asset Allocation are one and the same. Asset Allocation divides the investment portfolio into the two basic classes of investment securities: Stocks/Equities and Bonds/Income Securities. Most Investment Grade securities fit comfortably into one of these two classes.
Diversification is a risk reduction technique that strictly controls the size of individual holdings as a percent of total assets. A second misconception describes Asset Allocation as a sophisticated technique used to soften the bottom line impact of movements in stock and bond prices, and/or a process that automatically (and foolishly) moves investment dollars from a weakening asset classification to a stronger one... a subtle "market timing" device.
Let's say a person has 55% bonds, 45% stocks and 5% gold or precious metals. Each year they might want to "reallocate" their portfolio to readjust the allocations. For example, let's say bonds did well and they are not 65% of the portfolio. The investor during one day a year, would sell bonds and reallocate the money to stocks to get back to the 55/45/4 allocation.
Each year the person would want to reallocate their portfolio to insure the proper allocation. So if the 65 year old had a good year in bonds and was up to 75% of their allocation, they would
sell off 10% and reallocate their other asset classes by buying more stock. The nice thing about this re-balancing or reallocation is the investor sells high and buys low when reallocating.
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