Fundamentals of Investing

Abstract

The investment management process involves five steps: setting investment objectives, establishing an investment policy, selecting a portfolio strategy, constructing a portfolio, and evaluating performance. The investment process involves the analysis of the investment objectives of the entity whose funds are being invested. Given the investment objectives, an investor must then establish policy guidelines to satisfy the investment objectives. This phase begins with the decision as to how to allocate funds across the major asset classes and requires a thorough understanding of the risks associated with investing in each asset class. After establishing the investment objectives and the investment policy, the investor must develop a portfolio strategy. Portfolio strategies can be classified as either active or passive. The next step is to construct the portfolio by selecting the specific financial instruments to be included in the portfolio. Periodically, the investor must evaluate the performance of the portfolio and therefore the portfolio strategy. This step begins with the calculation of the investment return and then evaluates that return relative to the portfolio risk. Keywords: individual investors; institutional investors; asset classes; mutual fund; systematic risk; unsystematic risk; inflation risk; credit risk; interest rate risk; duration; liquidity risk; exchange rate risk; reinvestment risk; call risk; prepayment risk; active portfolio strategy; passive portfolio strategy; efficient portfolio; performance evaluation