What money means to you? Answer 10 simple questions.

What money means to you? Answer 10 simple questions.

https://myinvestingnotes.blogspot.com/2010/01/what-money-means-to-you-answer-10.html

In order to really make your money work for you, it is important to try and get

• to know more about yourself and
• your relationship with money. 

Some "money psychology" should help you to deal with your financial affairs in a smart way.

To find out more about your investment orientation and your relationship with money, answer the 10 simple questions below as honestly as possible.  This will also help set the necessary guidelines for your investment portfolio.

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This is an excellent exercise for self-discovery and building a foundation for a sound financial plan. The questions below are designed to uncover your psychological drivers, risk tolerance, and core beliefs about money to help set guidelines for your investment portfolio.

Please answer these 10 questions as honestly as possible. There are no right or wrong answers.

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Your Money Psychology & Investment Orientation Test

1. The Primary Purpose: What is the primary role you want money to play in your life?

• a) Security and peace of mind (to eliminate financial anxiety).

• b) Freedom and flexibility (to make my own choices with my time).

• c) A tool for building wealth and achieving long-term, large-scale goals.

• d) A means to enjoy life's experiences and luxuries now.

2. The Windfall Reaction: If you received an unexpected $10,000 bonus today, your first instinct would be to:

• a) Immediately pay down debt or add it to your savings account.

• b) Spend it on a vacation, a nice gift, or an experience you've been wanting.

• c) Invest the entire amount in a diversified portfolio for the future.

• d) A mix: save some, spend some, and maybe invest a little.

3. Market Volatility Response: Imagine you invest $5,000, and over the next 3 months, the market drops 20%. Your portfolio is now worth $4,000. What is your most likely reaction?

• a) Panic. I would sell my investments to prevent further loss.

• b) Concern, but I would hold tight and wait for it to recover.

• c) Opportunity. I would consider investing more to "buy the dip."

• d) I would feel indifferent; I invest for the long term and expect these fluctuations.

4. The Time Horizon Lens: When you think about investing, what timeframe feels most comfortable to you?

• a) Short-term (1-3 years): I may need the money soon.

• b) Medium-term (3-7 years): For a major purchase like a house.

• c) Long-term (7+ years): This is for my retirement, which is far away.

• d) I don't have a specific goal; I just want to grow my money.

5. The Emotion of Spending: How do you typically feel after making a significant, unplanned purchase?

• a) Guilty and anxious, second-guessing my decision.

• b) Thrilled and satisfied, with no regrets.

• c) Neutral; I budget for flexibility and this was within my means.

• d) It depends entirely on what I bought and the value it brings.

6. Financial Role Models: Which statement best describes the financial lessons you learned growing up?

• a) "Money doesn't grow on trees." / "We have to be careful with our spending." (Scarcity Mindset)

• b) "It's important to enjoy what you earn." / "You can't take it with you." (Spending Mindset)

• c) "Save for a rainy day." / "Always have a safety net." (Security Mindset)

• d) "Make your money work for you." / "Invest in assets." (Wealth-Building Mindset)

7. The Risk Thermometer: On a scale of 1 to 5, how do you feel about potential investment risk?
- 1 - Loss Averse: The possibility of any loss is unacceptable. I prefer guaranteed, low returns.
- 2 - Cautious: I'm comfortable with very low risk for stable, modest growth.
- 3 - Balanced: I can accept moderate risk and occasional downturns for the chance of better returns.
- 4 - Growth-Oriented: I am willing to accept significant risk for the potential of high growth.
- 5 - Aggressive: I am comfortable with high risk and volatility for the possibility of maximum returns.

8. The Legacy Question: What best captures your long-term financial aspiration?

• a) To be completely debt-free, including my mortgage.

• b) To achieve financial independence, so work is a choice, not a necessity.

• c) To build substantial wealth that can be passed on to my family or charity.

• d) To have a comfortable life without financial stress, without necessarily being rich.

9. Information Digestibility: When it comes to managing your investments, you prefer to:

• a) Set it and forget it. I don't want to check my portfolio frequently.

• b) Receive regular summaries and only be alerted for major decisions.

• c) Be actively involved, researching and adjusting my portfolio regularly.

• d) Delegate the decisions to a trusted financial advisor.

10. The "Enough" Number: Financially, what does "success" look like for you in 10 years?
- a) Having no financial worries and a solid emergency fund.
- b) Being able to work because I want to, not because I have to.
- c) Seeing my investment portfolio consistently growing year after year.
- d) Living a life rich in experiences, funded by my investments.

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How to Use Your Results:

Once you've answered, review your choices. Look for patterns:

• Mostly A's: Your primary money motivation is Security. Your investment portfolio should be heavily weighted towards capital preservation (e.g., high-yield savings, bonds, conservative funds).

• Mostly B's: Your primary money motivation is Lifestyle & Freedom. You need a balanced portfolio that allows for both growth and liquidity for experiences, with an automatic savings plan to keep you on track.

• Mostly C's: Your primary money motivation is Wealth Building. You likely have a higher risk tolerance and a long-term focus. Your portfolio can lean more towards growth-oriented assets like stocks and equity funds.

• Mostly D's: You have a Pragmatic or Delegator style. You value simplicity and expert guidance. A diversified portfolio with a mix of assets or using robo-advisors/managed funds would suit you well.

This self-assessment provides a crucial "why" behind your financial decisions, allowing you to build a portfolio strategy that you can stick with emotionally and psychologically, not just mathematically.

Knowing yourself – Investment Objectives, Time Horizon and Risk Tolerance.

 Knowing yourself – Investment Objectives, Time Horizon and Risk Tolerance.

Elaboration of Section 2

This section acts as the crucial bridge between the theoretical philosophy of Section 1 and the practical strategies that follow. It argues that even the most brilliant investment strategy is doomed to fail if it does not align with who you are as an individual. Before you look at the market, you must look in the mirror.

The section breaks down this self-assessment into three core pillars, with a fourth critical factor underpinning them all:

1. Investment Objectives (The "Why")
This is the destination for your financial journey. What is the purpose of this money?

• Examples:

  • Capital Preservation: Simply protecting your initial capital from inflation (a primary concern for those in or near retirement).

  • Income Generation: Needing the portfolio to produce a regular, reliable cash flow (e.g., for living expenses in retirement).

  • Capital Growth: Aiming to increase the value of the portfolio significantly over time (common for younger investors saving for a distant goal).

  • Speculative Gain: Acknowledging a portion of funds for higher-risk opportunities (as mentioned in Section 1's Policy D).

• Why it matters: Your objective determines the types of assets you will buy. An income objective leads you to dividend stocks and bonds, while a growth objective leads you to growth stocks. A mismatched objective (e.g., using a speculative stock for capital preservation) is a recipe for disaster.

2. Time Horizon (The "When")
This is the length of time you expect to hold the investment before you need to liquidate it for your objective.

• Short-Term ( < 3 years): Money for a down payment, a car, or an emergency fund. This money has no business in the stock market due to its short-term volatility. It belongs in cash or fixed deposits.

• Medium-Term (3-10 years): Goals like children's education or a future business venture. Can tolerate some equity exposure but with a significant cushion of safer assets.

• Long-Term (10+ years): Retirement savings for a young person. This horizon can fully embrace the volatility of the stock market, as there is ample time to recover from downturns and benefit from compounding.

• Why it matters: Time is your greatest ally against risk. A long time horizon allows you to take on more short-term volatility (risk) in pursuit of higher long-term returns. A short time horizon forces you to be conservative to ensure the money is there when you need it.

3. Risk Tolerance (The "How Much Can You Stomach")
This is a psychological and emotional assessment of your ability to endure fluctuations in the value of your portfolio without panicking.

• Conservative/Low Tolerance: You lose sleep when your portfolio value drops. You prioritize peace of mind over high returns. You are likely a Defensive Investor.

• Aggressive/High Tolerance: You view market dips as buying opportunities. You can watch your portfolio decline significantly without feeling the urge to sell. You are likely an Enterprising Investor.

• Why it matters: The biggest enemy of investment returns is often our own behavior—selling in a panic during a crash. Knowing your risk tolerance helps you construct a portfolio you can stick with through market cycles. The provided link to a money questionnaire is a tool to help quantify this often-intangible feeling.

4. The Underpinning Factor: Financial Capacity & Cash Flow
The section wisely notes that your personal financial situation is the bedrock of everything.

• Financial Resources: How much money do you have to invest? A small investor may start with mutual funds for diversification, while a larger one can build a portfolio of individual stocks.

• Cash Flow Analysis: Understanding your income and expenses is critical. You should only invest money you do not need for living expenses and emergencies. Investing money you can't afford to lose or might need soon forces you into a short-term, high-pressure mindset, which is the antithesis of intelligent investing.

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Summary of Section 2

Section 2 emphasizes that successful investing is deeply personal and begins with a rigorous self-assessment of your Investment Objectives, Time Horizon, and Risk Tolerance, all supported by a clear understanding of your Financial Capacity.

• Investment Objectives define your financial goals (e.g., growth, income, preservation).

• Time Horizon (how long you can invest) determines how much market risk you can afford to take.

• Risk Tolerance (your emotional comfort with volatility) determines how much market risk you can personally handle.

By honestly answering these questions, you can create a personalized, "tailor-made" investment plan. This self-knowledge ensures you select strategies from Benjamin Graham's menu (Section 1) that you can stick with consistently, preventing the emotionally-driven mistakes that destroy wealth. In essence, this section ensures your portfolio is built for you, not just for the market.

Know your Investment Profile

Your investment profile

Define your investment profile by identifying:
1.  Your goals and constraints
2.  Your risk ability and tolerance
3.  Your cognitive biases and their impact on your emotions.


Profiling:  everyone is unique

Differences go beyond the level of wealth and stem from:

• 1.  Age
• 2.  Education
• 3.  Phase of life
• 4.  Profession
• 5.  ...

Financial situation as the core of your profile

1.  A very wealthy person with relatively little planned expenses

• Will be able to take considerable investment risk, as you have enough funds aside to absorb potential losses.
• Will be said to have a "high risk ability"

2.  A person with limited wealth and a large part of his assets reserved for financial commitments:

• Can only take limited investment risk, as he lacks funds to cover potential losses
• Will be said to have a "low risk ability"

Ranking the objectives is also key

1.  List your objectives and rank them by degree of priority:

• Saving for retirement
• Providing for children's education
• Purchasing real estate objects

2.  Risk tolerance will be:

• High for less important objectives
• Low for important objectives

Investment horizon:  the longer, the better!

1.  The longer the investment horizon, the higher the risk ability

• .... as investments may recover from potential losses

2.  The shorter the investment horizon, the lower the risk ability

• .....  as investments cannot recover from potential losses.

3.  Unless you want to speculate ... but at your own risk!

Cognitive biases and the 3 steps in investing

Cognitive biases affect investment decisions when:

1.  Defining the investment universe

• Choosing which asset classes / securities are taken into consideration

2.  Constructing the optimal investment strategy

• Forecasting expecting returns and risk

3.  Adjusting and rebalancing the portfolio.

Cognitive biases:  defining the investment universe

When defining the assets universe you want to invest in:

• You tend to over-invest in local companies (home bias)
• You tend to overweight recent information (recency bias)

You should get out of your comfort zone and do extensive research on securities which may not necessarily be close to your home, nor provide readily available information.

Cognitive biases:  constructing the portfolio

When making forecasts:

• You may be influenced by recent data, which may not be relevant (anchoring bias)
• You tend to be over-confident (overestimating expected returns and / or underestimating risk)
• You tend to look for evidence which will confirm our beliefs and ignore information that contradicts them (confirmation bias)

Look for the black swan!

Cognitive biases:  rebalancing

When rebalancing the portfolio:

• You tend to overestimate the value of assets you own and underestimate the value of (similar) assets you do not own (endowment effect)
• You tend to sell winning positions too soon and hold onto losing positions for too long (disposition effect)

The right question to ask yourself

For example:  

You bought 1000 Nokia shares at 30 EUR.  The stock goes to 60 .. and then drops to 20 EUR.  The question to ask yourself is:

"If I had 20,000 EUR today, would I purchase 1000 Nokia shares?"

• If you answer "yes", then keep the position.
• If you answer "no", then sell it.

Conclusions

Before constructing a portfolio, you need to define your

• Objectives
• Risk ability and tolerance

You should be aware that you are influenced by cognitive biases which may lead to sub-optimal investment decisions.

You should try to adjust as much as possible for these biases.

PORTFOLIO MANAGEMENT

Portfolio of securities may offer equivalent expected returns with lower volatility of returns (lower risk) compared to individual securities.

The composition of the portfolio is an important determinant of the overall level of risk inherent in the portfolio.

By varying the weights of the individual securities, investors can arrive at a portfolio that offers the same return as an equally weighted portfolio, but with a lower standard deviation (risk).


Steps in the Portfolio Management Process

1.  Planning:

• The investment objectives - Understanding the investor's needs and constraints
•  Developing an investment policy statement (IPS) - The IPS is a written document that    describes the objectives and constraints of the investor.

2.  Execution:  

• Asset allocation - distribution of investable funds between various asset classes e.g., equities, fixed-income securities, alternative investments, etc.)
• Security Analysis - Analysis of companies and the industry to identify investments that offer the most attractive risk return characteristics from within each asset class.
• Portfolio construction - Constructing the portfolio, after determining the target asset allocation and conducting security analysis, in line with the objectives outlined in the IPS.

3.  Feedback

• Portfolio monitoring and rebalancing - The portfolio must be regularly monitored.  Changes in fundamental factors and investor's circumstances may require changes in the portfolio's composition.  Rebalancing may be required when changes in security prices cause a significant change in weight of assets in the portfolio.
• Performance measurement and reporting - This step involves measuring the performance (absolute or relative performance) of the portfolio stated in the IPS.

Principles of Portfolio Planning

Investors benefit from holding portfolios of investments rather than single investments.

Without necessarily sacrificing returns, investors who hold portfolios can reduce risk.

Surprisingly, the volatility of a portfolio may be less than the volatilities of the individual assets that make up the portfolio.

When it comes to portfolios and risk, the whole is less than the sum of its parts!



Investment Goals

A portfolio is a collection of investments assembled to meet one or more investment goals.

Different investors have different objectives for their portfolios.

The primary goal of a growth-oriented portfolio is long-term price appreciation.

An income-oriented portfolio is designed to produce regular dividends and interest payments.




Portfolio Objectives

Setting portfolio objectives involves definite tradeoffs, such as the tradeoff

• between risk and return or 
• between potential price appreciation and income.

How you evaluate these tradeoffs will depend on your tax bracket, current income needs, and the ability to bear risk.

The key point is that your portfolio objectives must be established BEFORE you begin to invest.

The ultimate goal of an investor is an efficient portfolio, one that provides the highest return for a given level of risk.

Efficient portfolios are not necessarily easy to identify.

You usually must search out investment alternatives to get the best combinations of risk and return.

Be realistic and you will avoid disappointment

It is worth reflecting on what your objectives are in your investment journey.

Having a clear sense of what you REALISTICALLY expect to achieve will help you to focus on what types of shares you may wish to buy, and having already considered what type of investing personality you are, what behaviours to be aware of and what your risk tolerance is, you can start to search for your investments with a clear sense of why you are going down a particular road.

If you do not have a clear sense of what you wish to achieve, it will be much more likely that you will make a less than optimum choice of investments, and that you may become disillusioned with what you achieve.

Be modest in your ambitions and realistic about what can be achieved. 
-  Do not expect to be right 100% of the time.  Anything over 50% of the time and you are doing well.
-  One of the key skills to learn is a little about how to understand and appreciate a business, and not the share price.  This approach will serve you well.



You should be realistic about your goals.

"In this business if you're good, you're right six times out of ten.  You're never going to be right nine times out of ten."  Peter Lynch

"It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong."   George Soros

"If you took our top 15 decisions out, we'd have a pretty average record.  It wasn't hyperactivity, but a hell of a lot of patience.  You stuck to your principles and when opportunities came along, you pounced on them with vigor."  Charlie Munger.



Expect some of your share to go down, and some to go up.  The more you do your research and the more you learn over time, the relative proportion of the latter in relation to the former should increase.  If it does not, you may want to step back and reflect on what might be going wrong.  

A tolerance for ambiguity will serve you well as an investor, as will an inquiring mind.

There are times when you should use other products besides stocks. When to avoid stocks?

Investing in stocks is not always the best answer for a financial goal.  There are times when you should use other products beside stocks.

Investing in stocks to meet short-term goals is usually not a good idea.  Do not use stocks for any goal that is fewer than five years from completion.  Any financial goal you need to achieve in fewer than five years is exposed to a risk that the stock market will swing to the downside just when you need the money.  The best plans can be sabotaged by a volatile stock market over the short term.

As you approach retirement, you will want to dial back your exposure to stocks and move into safer alternatives.

Warren Buffett's Investment Objectives

Goals

     Our long-term economic goal is to maximize the average annual rate of gain in intrinsic business value on a per-share basis.  We do not measure the economic significance or performance of Berkshire by its size; we measure by per-share progress.  We are certain that the rate of per-share progress will diminish in the future - a greatly enlarged capital base will see to that. We will be disappointed if our rate does not exceed that of the average large American corporation.

2.     Charlie Munger and I can attain our long-standing goal of increasing Berkshire's per-share intrinsic value at an average annual rate of 15%.  We have not retreated from this goal.  We again emphasize that the growth in our capital base makes 15% an ever-more difficult target to hit.

3.     What we have going for us is a growing collection of good-sized operating businesses that possess economic characteristics ranging from good to terrific, run by managers whose performance ranges from terrific to terrific.  You need have no worries about this group.

4.     The capital-allocation work that Charlie and I do at the parent company, using the funds that our managers deliver to us, has a less certain outcome: It is not easy to find new businesses and managers comparable to those we have.

Comments:

1.  Maximise growth in net worth over the long term.

2.  Aiming for average annual growth rate of 15%.

3.  Collect a group of great companies run by great managers.

4.  Re-allocate the funds generated by these great companies.

My Investing Objective

My investing objective:  
To grow my whole portfolio by 15% per year over many years, that is, doubling the portfolio value every 5 years.











For every 5 stocks, expect 3 to do averagely, 1 to do exceptionally well and 1 to underperform.  Sell the underperformer and keep the winners.  By ensuring that you do not lose or lose small (not big), the modest gains from your stocks will translate into good gains for your overall portfolio.

For every 5 years in the stock market, expect 4 bull years and 1 bear year.  If you can avoid investing in a bubble market, you will often be safe with your carefully chosen and implemented philosophy and strategy.



There are many variables affecting the returns of your investing.

Choose a long term time horizon (>10 years) for your investing.  The reasoning is as below. 



You can see here why stocks are considered a good long-term investment, but a horrible short-term investment. This chart shows that for any 25-year period within 1950-2005, the very worst you would have done was +7.9% annually while the best was +17.2%. However, for a 1-year time horizon, the possible returns vary wildly.

The Complete Investment System

A complete investment system has detailed rules covering these 12 elements:

1. What to buy
2. When to buy it
3. What price to pay
4. How to buy it
5. How much to buy as a percentage of your portfolio
6. Monitoring the progress of your investments
7. When to sell
8. Portfolio structure and the use of leverage
9. Search strategy
10. Protection against systemic shocks such as market crashes
11. Handling mistakes
12. What to do when the system doesn't work

The first test of your system is obviously whether or not it makes you money.  If your system is profitable, you'll be getting a return on your capital.

Buffett and Soros measure their performance against three benchmarks:

1. Have they preserved their capital?
2. Did they make a profit for the year?
3. Did they outperform the stock market as a whole?

The benchmarks you choose will depend on your financial goals.  When you have established your benchmark, you can then measure whether your system is working or not.

2012 Goal Setting Workshop - by Jim Rohn

Investment Objectives

Evaluation of Customers - Investment Objectives

This section refers to general investment objectives, not the client's specific needs such as retirement at a certain age or college plans for his/her children (see the next section on capital needs). However, there is certainly a correlation between the two, and it is useful to know the characteristics of each of these investment goals:

• Preservation of capital - the investor is more concerned with safety than return. Treasury bills and money market funds may be most appropriate.
  
• Current income- the investor needs a portfolio that produces steady income for current living expenses. Bonds, annuities, and stocks with high dividends (such as utility stocks) may be appropriate.
  
• Tax-exempt income -
  
• Growth and income - the investor is looking for a portfolio that generates some amount of income, but he/she is looking for capital appreciation as well (often for protection against inflation). Appropriate investments could include a mix of bonds and stocks.
  
• Capital appreciation - the investor's goal is likely retirement or another event in the future, where growth is required and current income is not needed. A diversified stock or mutual fund portfolio is appropriate.
  
• Aggressive growth - the investor is looking for high-risk investments with a potential for very large returns. This is rarely the goal for an entire portfolio, but rather for a specific portion of assets. Aggressive growth funds and small-cap issues may be most appropriate.

Read more: http://www.investopedia.com/exam-guide/finra-series-6/evaluation-customers/investment-objectives.asp#ixzz1yhxwhzOn

Portfolio Management - Return Objectives and Investment Constraints

Return objectives can be divided into the following needs:

1. Capital Preservation - Capital preservation is the need to maintain capital. To accomplish this objective, the return objective should, at a minimum, be equal to the inflation rate. In other words, nominal rate of return would equal the inflation rate. With this objective, an investor simply wants to preserve his existing capital.

2. Capital Appreciation -Capital appreciation is the need to grow, rather than simply preserve, capital. To accomplish this objective, the return objective should be equal to a return that exceeds the expected inflation. With this objective, an investor's intention is to grow his existing capital base.
3. Current Income -Current income is the need to create income from the investor's capital base. With this objective, an investor needs to generate income from his investments. This is frequently seen with retired investors who no longer have income from work and need to generate income off of their investments to meet living expenses and other spending needs.

4. Total Return - Total return is the need to grow the capital base through both capital appreciation and reinvestment of that appreciation.

Investment ConstraintsWhen creating a policy statement, it is important to consider an investor's constraints. There are five types of constraints that need to be considered when creating a policy statement. They are as follows:

1. Liquidity Constraints - Liquidity constraints identify an investor's need for liquidity, or cash. For example, within the next year, an investor needs $50,000 for the purchase of a new home. The $50,000 would be considered a liquidity constraint because it needs to be set aside (be liquid) for the investor.
2. Time Horizon - A time horizon constraint develops a timeline of an investor's various financial needs. The time horizon also affects an investor's ability to accept risk. If an investor has a long time horizon, the investor may have a greater ability to accept risk because he would have a longer time period to recoup any losses. This is unlike an investor with a shorter time horizon whose ability to accept risk may be lower because he would not have the ability to recoup any losses.
3. Tax Concerns - After-tax returns are the returns investors are focused on when creating an investment portfolio. If an investor is currently in a high tax bracket as a result of his income, it may be important to focus on investments that would not make the investor's situation worse, like investing more heavily in tax-deferred investments.

4. Legal and Regulatory - Legal and regulatory factors can act as an investment constraint and must be considered. An example of this would occur in a trust. A trust could require that no more than 10% of the trust be distributed each year. Legal and regulatory constraints such as this one often can't be changed and must not be overlooked.

5. Unique Circumstances - Any special needs or constraints not recognized in any of the constraints listed above would fall in this category. An example of a unique circumstance would be the constraint an investor might place on investing in any company that is not socially responsible, such as a tobacco company.

The Importance of Asset AllocationAsset Allocation is the process of dividing a portfolio among major asset categories such as bonds, stocks or cash. The purpose of asset allocation is to reduce risk by diversifying the portfolio. 

The ideal asset allocation differs based on the risk tolerance of the investor. For example, a young executive might have an asset allocation of 80% equity, 20% fixed income, while a retiree would be more likely to have 80% in fixed income and 20% equities.
Citizens in other countries around the world would have different asset allocation strategies depending on the types and risks of securities available for placement in their portfolio. For example, a retiree located in the United States would most likely have a large portion of his portfolio allocated to U.S. treasuries, since the U.S. Government is considered to have an extremely low risk of default. On the other hand, a retiree in a country with political unrest would most likely have a large portion of their portfolio allocated to foreign treasury securities, such as that of the U.S.

Read more: http://www.investopedia.com/exam-guide/cfa-level-1/portfolio-management/return-objectives-investment-constraints.asp#ixzz1yfCssLbg

Portfolio Management - The Portfolio Management Process

The portfolio management process is the process an investor takes to aid him in meeting his investment goals.

The procedure is as follows:

1. Create a Policy Statement -A policy statement is the statement that contains the investor's goals and constraints as it relates to his investments.
2. Develop an Investment Strategy - This entails creating a strategy that combines the investor's goals and objectives with current financial market and economic conditions.
3. Implement the Plan Created -This entails putting the investment strategy to work, investing in a portfolio that meets the client's goals and constraint requirements.
4. Monitor and Update the Plan -Both markets and investors' needs change as time changes. As such, it is important to monitor for these changes as they occur and to update the plan toadjust for the changes that have occurred.

Policy StatementA policy statement is the statement that contains the investor's goals and constraints as it relates to his investments. This could be considered to be the most important of all the steps in the portfolio management process.The statement requires the investor to consider his true financial needs, both in the short run and the long run. It helps to guide the investment portfolio manager in meeting the investor's needs. When there is market uncertainty or the investor's needs change, the policy statement will help to guide the investor in making the necessary adjustments the portfolio in a disciplined manner.

Expressing Investment Objectives in Terms of Risk and ReturnReturn objectives are important to determine. They help to focus an investor on meeting his financial goals and objectives. However, risk must be considered as well. An investor may require a high rate of return. A high rate of return is typically accompanied by a higher risk. Despite the need for a high return, an investor may be uncomfortable with the risk that is attached to that higher return portfolio. As such, it is important to consider not only return, but the risk of the investor in a policy statement.

Factors Affecting Risk ToleranceAn investor's risk tolerance can be affected by many factors:

• Age- an investor may have lower risk tolerance as they get older and financial constraints are more prevalent.
• Family situation - an investor may have higher income needs if they are supporting a child in college or an elderly relative.
• Wealth and income - an investor may have a greater ability to invest in a portfolio if he or she has existing wealth or high income.
• Psychological - an investor may simply have a lower tolerance for risk based on his personality.

Read more: http://www.investopedia.com/exam-guide/cfa-level-1/portfolio-management/portfolio-management-process.asp#ixzz1yfBLNFTr

Top 10 Things to Do Before You Invest

Top 10 Things to Do Before You Invest
by Michele Cagan, CPA

1. Pay off every penny of credit card debt. You'll earn sky-high (18 to 22 percent!) returns just by paying your credit card balance in full rather than making the minimum monthly interest-laden payments.

2. Build yourself an emergency fund. Start a separate bank account for this purpose alone. It should have enough money to cover at least three to six months of living expenses.

3. Set up and follow a household budget. Keep track of where your money comes from and (even more important) where it's going.

4. Set clear financial goals. Whether you want to save for a new car this year or retirement twenty years from now, you need to know why you're investing.

5. Determine your time frame. How long your money will be working for you plays a key role in designing the best portfolio.

6. Know your risk tolerance. Investing can bring about as many downs as ups, and you have to know just how much uncertainty you can comfortably stand.

7. Figure out your asset allocation mix. Before you start investing, know what proportion of your portfolio will be dedicated to each asset class (like stocks, bonds, and cash, for example).

8. Improve your understanding of the markets. That includes learning about the big picture, such as the global political and economic forces that drive the markets and affect asset prices.

9. Set up your brokerage account. Whether you decide to start out with a financial advisor or take a more do-it-yourself approach, you'll need to have an open brokerage account before you can make your first trade.

10. Analyze every investment before you buy it. Buy only investments that you have researched and fully understand; never risk your money on an unknown.

http://www.netplaces.com/investing/planning-for-success/top-ten-things-to-do-before-you-invest-1.htm

Super High-Growth Portfolio - Pushing the Limit to achieve Maximum Portfolio Growth

There are investors who can and should invest the time and effort to create a supper high-growth portfolio.

Although it will require greater effort in selection and maintenance, a high-performance portfolio can be achieved while abiding by the commandments of value.

Any appearance of higher risk must be well understood and accounted for in the share price.

Pushing the limit, say Graham and Dodd, is a game for the strong-minded and daring individual.


According to Graham, a growth stock should double its per share earnings in 10 years - that is, increase earnings at a compound annual rate of over 7.1%.  To do so, a growth stock's sales should be continually higher than sales in the early years.

The investor who can successfully identify such "growth companies" when their shares are available at reasonable prices is certain to do superlatively well with his capital.

Conquer Your Fear of Investing

Updated: 8/11/2011 

Many of the most worthwhile things in life are scary at first. Consider, for example, going to school for the first time, falling in love, learning to drive, starting a family, figuring out your new Tivo…

Investing is no exception. The thought of possibly losing money is a terrifying prospect. And the fact that today’s economy has seen better days probably isn’t helping those fears. Investing in the stock market has its risks. But if you give in to fear, you’ll pass up some incredible opportunities—ones that come with big dollar signs attached.

Now is actually a good time for young adults to bite the bullet and get started investing. Think of a market downturn as a clearance sale: It’s a good idea to go shopping before prices climb again.

Bottom line: Surrendering to fear only holds you back. If you want to get ahead financially, you’ve got to invest in your future. Below are five common excuses and the strategies you’ll need to overcome them.

FEAR: I don't want to lose all my money.

CONQUER IT: Diversify.

If your investments are too heavily-weighted in one stock or even one particular kind of stock, you can deep-six your savings goal. (Remember the tech bubble or, more recently, the financial services crisis?) Mutual funds are a good way to achieve instant diversification because they allow you to invest in dozens of stocks within a single fund.

One of the quickest ways to diversify, if you’re new to investing, is with a fund of funds that invests in other mutual stock funds. Or if you’d like something a little more conservative in this uncertain market, go for a so-called “balanced” fund that owns stocks as well as bonds. But bear in mind that for long-term goals, stocks should earn you the highest return.

FEAR: How will I know the best time to invest?

CONQUER IT: Dollar-cost average.

There’s no crystal ball that tells you exactly when the market will rise and fall. The trick is to invest regularly no matter what the market is doing. A simple strategy called dollar-cost averaging eliminates the guesswork. By investing a fixed dollar amount at regular intervals, such as every month or every quarter, you smooth out the ups and downs of the market. This trick takes out all the emotion—it’s scary to invest when the market’s falling, for example—and investing becomes much less daunting.

Mutual funds are, again, a great investment for dollar-cost averaging because you aren’t charged a commission each time you buy (like you are for individual stocks).

FEAR: I'm too queasy for the ups and downs of investing.

CONQUER IT: Ignore your investments.

When you obsess over how your investment is doing from day to day or week to week, you could be more tempted to tinker with it instead of sticking to your long-term diversified plan. Not to mention, you’ll probably lose sleep.That’s not to say you shouldn’t ever reevaluate your investment choices. Just don’t fixate on them.

FEAR: I don't have the time or knowledge to manage a portfolio well.

CONQUER IT: All-in-one funds or index funds.

Think simple. When you start investing and aren’t sure what you’re doing, don’t pretend you do. Truth is, most actively managed mutual funds don’t beat their market benchmarks. If those fund managers have the time, the education and the motivating paycheck, and they can’t pull it off, don’t worry if you’re afraid you can’t either.

Go with funds of funds to achieve instant diversification. Or assemble a simple index fund portfolio. Index funds don’t try to beat the market benchmarks, they match them. Put 75 percent of your money into a fund that tracks the overall U.S. stock market, 25 percent into one that tracks international stocks. Then let ’em ride. As your investments rise and fall, all you’ll have to do is realign your money every year or so to maintain the proper weighting in each fund.

One more way to set it and forget it: Sign up with your broker or fund company to have your regular contributions automatically withdrawn from your bank account.

FEAR: What if I need the money?

CONQUER IT: Set clear goals and choose your investments accordingly.

Before you start investing, write down what you’re investing for and when you think you’ll need the money.

If you’ll need the money within the next three to five years, preservation is your number-one aim. Put that money somewhere safe and accessible, such as a money market mutual fund or a high-yield online savings account. You could also opt for a bank certificate of deposit. But bear in mind your money is locked in for the term of the CD, and you’ll pay a hefty penalty if you need to cash out early.

If you’re investing for the long term, growth is your goal. Invest that money in a broad-based mutual fund that holds mostly stocks. If disaster strikes and you really need the money, you can cash out at any time – but you’ll have to pay taxes on the money you made.

http://www.kiplinger.com/magazine/archives/2009/01/fred_frailey.html