Lack of investment process is one of the main reasons why a lot of investors lose fortunes within a year or so. You may make the decision to invest because the markets were apparently going up.
But, what if the same market deteriorates after a certain time? You may end up losing your capital because you didn’t think about protecting them in the first place. It’s okay to have a goal.
But, it is also equally important to focus on the steps that will take you to your goal. Investors often tend to focus on the outcome alone,
thereby forgetting the importance of investment process, which answers the following questions:
- What to sell or buy?
- When to sell or buy?
- Why should you sell or buy?
- How much to buy or sell?
Remember, the investment process is a mental framework. This framework is what you need to make successful investments in the future.
3 Important Steps of Investment Process
Here are three major reasons why investment process is important.
1. Recognizes the Importance of Risk
You fail to notice unforeseen emergencies when you ignore the importance of investment process. What are the possible obstacles that can prevent you from gaining the desired outcome?
Are there any risks associated with investing in a specific market or stocks?
You will find all the answers to these questions through successful portfolio management, which is basically the process of managing individual investments.
After all, recognizing the meaning and sources of risks is one of the main objectives in portfolio management.
Portfolio management can help you identify the following types of risks:
External Sources of Risks
- Financial market
- Legal and regulatory requirements
- Technological devices
- Political events
- Pressures of globalization
- Environmental concerns
Internal Sources of Risks
- Management decisions
- Shifting priorities
- Funding reallocation
- Lack of integrity
Imagine you are investing large sums of money every year without focusing on your portfolio management or rather the investment process. Thus, you stay unaware of what’s going on within your investment avenues, thereby making your investments susceptible to all the risks mentioned above.
2. Outlines the Steps for Creating a Strong Portfolio
Let’s say you have a dream in your life. For example, you know what you want to drive and where you want to live. But, you don’t calculate what this lifestyle would cost you and whether you would be able to afford it or not. Outcome? Turning your dream into reality becomes almost impossible.
Similarly, achieving your investment goals can be very difficult without a strong portfolio. A complete financial portfolio helps you make diversified investments across multiple asset classes and also helps you enjoy fully-funded retirement accounts.
What are the basic steps for building a strong financial portfolio?
Step1: Pick the right type of investment account that fits your financial goals
There are different types of investment accounts and each of them serves a specific purpose. For example, education accounts are used to take care of education expenses. And standard brokerage accounts provide access to a broad range of investments.
Step2: Consider your risk tolerance before making investments
You can invest in stocks, funds, and mutual funds depending on your risk tolerance. Stocks, for instance, are a slice of ownership in an organization. You may invest in stocks that you believe will go up in value with time. The risk is that the prices of stocks may not go up as you had planned.
Step3: Determine the portion of your assets that you want to dedicate to stock investments
You have determined the kind of asset you want to invest in. But what about the portion of each asset class that you want to invest in? That’s why you need to split up your portfolio among different kinds of assets, depending on your risk tolerance levels.
All your investments build the foundation for your portfolio. The more successful your investments are, the stronger you will be an overall portfolio. Whether you want to invest in online assignments to help industries or own a home, a strong financial portfolio is what you need to achieve the desired financial success.
3. Lets you Explore Different Investment Philosophies & Strategies
Investors often think that what has worked for their friends and colleagues will work for them too. This thought stems from the fact that most of you tend to chase returns instead of getting the process of investment right. Successful investments are way more than just investing in high-yielding instruments to reach financial goals.
You have to consider other factors such as liquidity, risks, duration, taxes, etc. as well throughout the process of your investments. And dealing with these factors can help you explore multiple investment philosophies and strategies.
Important Investment Philosophies
- Fundamental investing– Relies on identifying organizations with strong earnings prospects.
- Value investing– involves investing in stocks that you may believe are currently underpriced by the market. However, you also believe that the prices will eventually rise.
- Growth investing– Includes buying shares of companies whose services or products have the potential to generate strong earnings.
Important Investment Strategies
- Growth investing- Look for investments that have the potential to lead to future earnings of stock.
- Momentum investing– Use a strictly data-driven approach to investing and look for specific patterns at stock prices to make the right purchasing decisions.
- Dollar-cost averaging– Practise investing regularly in the market over time.
Investment philosophies and strategies aren’t a mere set of beliefs and principles. These are guidelines that help an investor make the right investment decision. Explore as many strategies and philosophies as possible during your investment process to reach your financial goals efficiently.
Investors should set realistic objectives when it comes to earning money from investments. A disciplined investment process is imperative if you want to make the most of multiple financial opportunities.
Learn to discipline yourself, get familiar with the tools used by professional investors, and change your financial position as and when required during the investment process.
The investment process handles all your assets. If you don’t focus on it, you may end up in financial disappointment. You may have accomplished previously, even without a proper plan or process.
That doesn’t guarantee your success in future investments, too and that is why you need to follow a robust investment process for profitable earnings.