Stock exchange investment strategies and analysis

Investment Strategy

When the market crashes, turns bearish, or severely corrects, investors not only lose objective things such as money, they also lose the sustaining functions of which the investing process (and/or money, which may psychologically represent self-esteem, independence, power, etc.) has been the source. That means, in addition to objectively not having the money to buy that new house or car, self-esteem drops, and the investors capacity to calm themselves down is diminished, motivation wanes, confidence is shaken, and vitality ebbs. A down market represents an injury to our total sense of self and all the functions that sustain it. In a general way it represents a hope or fantasy lost.

For the young investor, with a large amount of earning power remaining in his life, the ups and downs of the market are small obstacles to the long-term objective of amassing a financial nest egg on which to retire. However, for the investor who is nearing retirement, taking into consideration their risk tolerance is one of the most important aspects of finding a suitable investment vehicle.

Peter Smith and his wife are nearing retirement. Peter has 950,000 to invest today, and over the next 5 years he will accumulate another 50,000 to round out the number to an even 100,000. Their ideal goal is to create an investment portfolio which will allow them to live comfortably for the rest of their lives, and pass much of their accumulated wealth onto their two children at the time of their passing. Unfortunately because they have waited so long to begin an investment career, they have limited both their options, and their ability to safely secure a higher return. While Mr. Smith may be knowledgeable in the workings of the market, he cannot control them, and with the nearing event horizon of their retirement, he will be wise to bow to his wife's conservative bent as they seek the right investment vehicles for their future.

Creating an investment portfolio is an important mixture of finding a return with which the client is satisfied, and an investment vehicle in which the client is comfortable riding for a number of years. Many investors say they are prepared to take high risks in the pursuit of high profits. Most are wrong. When an investment starts going down in value, feelings of nervousness quickly start to surface. The trouble is, people only discover their lack of risk tolerance once their investment has lost value. By then, it can be too late to recover all of their initial capital. (McEwen, 2001

An individual's investment approach may be costly if it's not the right one to achieve individual financial goals. This is true for any approach whether it's called conservative, moderate or aggressive. An investment approach must be based on financial goals, ability to save, overall personal financial assets, investment time horizon and tolerance for risk -- the ability to accept the swings that come with investing in the financial markets (Block, 1998)

The other important factor in successful investing is diversification. Diversification, which is the process of spreading investments across a variety of asset classes with varying risk-return characteristics, is critical to assuring personal retirement security. Diversification can level out the risks of investing because the differing sectors of the market respond differently to economic shifts. By diversifying, a client can lower his risk, and thus create a more stable investment future.) Holding a diversified portfolio will not eliminate risk, but " it does allow you to choose what type of risk you are willing to take and the amount of each type of risk you are willing to bear," says William Droms, a finance professor at Georgetown University (Luke, 2000)

Regarding the Smiths, their small event horizon necessitates choosing farily conservative investment vehicles. Bonds, government bonds, and income oriented mutual funds are those which fit into their investment needs. Individual stocks, or aggressively positioned mutual funds will to too large of a risk for their investment needs. The other asset the Smiths can invest is the value of their business. The couple could sell the business outright, and look to invest the sum as additional capitol, or lease the business to a new owner, and construct an additional income stream.

As a specific recommendation, the Smiths would be wise to pursue the following plan.

Invest the 950,000 and the additional 50,000 as it becomes available in a high grade, or government bond fund, with a history of returning 7-8%. This would be a lower risk investment, but probably at the top of Mrs. Risk tolerance. The pupose of this investment would be to let it accumulate for 18 years, after which it will have doubled in value twice, to a total value of 400,000.