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Personal Investing

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Step 1: Set your financial goals

Step 2: Understand investment vehicles

Step 3: Develop an investment strategy

Step 4: Implement your strategy

Step 5: Monitor the performance of your investments

Personal Investing Steps

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Four Elements in Setting Your Financial Goals

Step 1: Set Your Financial Goals

• Your investment time horizon

• Your priorities

• Quantification

• Your personal investment profile

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Your Time Investment

Horizon

The length of time that you have to reach your

goal is considered by many advisors as the most

important factor in determining which type of

invest ment is best suited to meet that goal

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Your Priority

You must also prioritize your financial goals and

decide which are necessary and which are

merely desirable

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Quantification

• After determining your financial priorities, you

should develop financial projections and calculate

different alternative scenarios to quantify your

goals.

• From these calculations, you can then establish

the amount you can save and what rate of return

is necessary from your investments to assure that

you'll achieve your goals.

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Your Personal Investment Profile

Your investment profile is shaped by:

• Your age and the stage in your career

• Your need for liquidity

• The size of your portfolio

• Your cash flow needs

• Your income tax bracket

• Your required rate of return

• Your risk tolerance

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Step 2: Understand Investment Vehicle

Three Major Investment Vehicles:

• Cash• Bonds• Stocks

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The Bonds

Corporate bonds

U.S. government securities

Municipal bonds

Mortgage-backed securities

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The Stocks

• Income Stocks

• Growth Stocks

• Value Stocks

• Cyclical Stocks

• Defensive Stocks

• Blue Chip Stocks

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Income Stocks

• Income stocks are those with a long and

sustained record of paying high dividends.

• Generally, a company whose common stock falls

into this category is in a fairly stable and mature

industry (e.g., an electric utility company).

• Because these companies distribute (rather than

reinvest) their earnings, their stocks are less

likely to experience substantial capital

appreciation.

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Growth Stocks

• Growth stocks are stocks that are expected to

experience high rates of growth in operations

and/or earnings.

• These growth rates are usually substantially

higher than the market averages.

• Growth stocks are generally much riskier than

income stocks.

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Value Stocks

• These are stocks of companies which are considered undervalued because they may be in an industry that is out of favor, they may be experiencing management turmoil, or they may be restructuring their business operations.

• These stocks tend to have lower price/earnings and price to book ratios than growth stocks do.

• Their prices are cheap compared to the prices required to be paid for growth stocks.

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Cyclical Stocks

• Typically, cyclical stocks are stocks of

companies whose earnings tend to follow the

business cycle.

• Highly cyclical industries include oil and other

natural resources, steel, and housing.

• Cyclical stocks are often more risky than

stocks in companies less subject to changes in

the business cycle.

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Defensive Stocks

• Defensive stocks are stocks that are, in a sense,

countercyclical.

• Prices of these stocks tend to remain stable or

perhaps rise during periods of economic downturn,

while showing poorer results (in comparison to

other stocks) during periods of economic upturn.

• Defensive stocks are well-established companies

producing goods that are generally still in demand

during an economic downturn, such as food,

beverages, and pharmaceuticals.

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Blue Chip Stocks

• The stocks of the companies with the highest overall quality are those considered to be "blue chips."

• The companies with blue chip common stocks are often financially stable companies with steady dividend-paying records during both good and bad years.

• They are usually the leaders within their industry or industry segment.

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Step 3: Develop An Investment Strategy

Developing this strategy involves three tasks:

1. Select an Asset Allocation

2. Formulate a Goal-Funding Plan

3. Understand Transaction Cost

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Task 1 : Select An Asset Allocation

• What asset classes do you want in your portfolio, and in what combination?

• The asset classes should be as many as possible based on your investment profile.

• The proportion of your portfolio to allocate to each asset class is ideally determined based on historical data.

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Task 2 : Formulate a Goal-funding Plan

• Before you make actual investments, you must identify the specific goals that you want to fund.

• Then you can purchase the appropriate investments based on when the item being funded will be paid.

• Therefore, your first task in developing an investment strategy is to formulate a goal-funding plan.

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Task 2 : Formulate a Goal-funding Plan

• Here are some typical investments

suitable for three sample goals:

• Contingency fund: money market fund

• College funding for a 16-year-old:

bonds maturing in 2-6 years

• College funding for a 2-year-old:

common stock portfolio

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Task 3 : Understand Transaction Cost

1.Commissions

2.Income Tax

• You should consider those two transaction costs because in the long run they can significantly reduce your investment return

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Step 4: Implement Your Strategy

• Implementing your strategy involves two

fundamental issues :

• How to Buy

• When to Buy

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How to Buy

You have four options to buy :

• Through an investment advisor or

financial planner

• Through broker (either full-service or

discount)

• Through a professional money manager

• Through mutual fund

• Through an insurance company

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WHEN to Buy

• You can use dollar cost averaging

strategy to decide when to buy

• Let’s say you have $ 2,500 to invest. Using

dollar cost averaging, you’d not invest all

your money at once; instead, you’d invest

$ 500 per month for 5 months.

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Step 4: Monitor Your Investment

• Once you implemented your investment

strategy, it’s important that you monitor your

investment from time to time to ensure that

they remain appropriate for your financial

goals.

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Step 4: Monitor Your Investment

• While you should generally try to avoid

frequent changes to your investments, you

should periodically (for instance, annually)

assess each investment’s performance to se

that it meets your expectations.