FREE ESSAY ON INVESTMENT PHILOSOPHY

INVESTMENT PHILOSOPHY

The Care And Feeding Of Your Investment Philosophy
If you are making a list of tasks you should accomplish in 1988, here's one to add to the
list: Establish a well-balanced investment plan that suits your personal financial needs
and goals.
Every investor from the newest to the most experienced needs to develop or redefine an
investment philosophy. The cornerstone of that philosophy should be a realistic attitude
toward risk and return, especially in today's volatile financial markets. What is your
personal comfort level with risk, emotionally and financially?
The first step is to acknowledge your investment objective. Are you investing capital to
earn income on which you will live? If so, you should probably choose the most
conservative investments unless you are so well off that you can afford to take some
risks.
If you are investing capital to realize appreciation for a future purpose, such as
retirement, you may want to be more aggressive than an investor for income would be, but
how much more depends on a number of factors: Are you single or married with children and
other dependents? Are you just beginning your career, heading into your peak earning
years or ready for retirement?
Will you need to tap your nest egg in the near future, or can you earmark a portion of
your funds for long-term growth? Also important: your financial goals, your family's tax
bracket and, above all, your earning power and investment temperament.
Earning Power. Generally speaking, as your income rises so does your suitability for
investments of above-average risk. If, on the other hand, your salary and savings are
small but growing - keep risk taking to a bare minimum. Maintain only solid investments
for your portfolio. U.S. Government Securities, insured certificates of deposit, high
quality corporate or municipal bonds, and high quality common stocks offer you reasonable
safety at a steady rate of return and they should form the base of almost every
investment portfolio.
If you can count on future income - or a sizable accumulation of assets - to cushion
possible investment losses then perhaps you will want to consider opportunities that may
carry greater risk, but also offer greater potential for profit. One way to do that is to
invest in small companies with superior growth prospects or mutual funds that have a
diversified portfolio in such stocks. In addition to income and net worth, measure your
future cash needs, such as college tuition bills.
Investment Temperament. Some people are more disposed than others to taking risks, and
common sense suggests avoiding investments that leave you feeling uncomfortable. An
investment of slightly above-average risk may set one investor's heart beating with
anticipation - and another's beating even faster with apprehension. One helpful rule of
thumb: Never invest in anything if you still feel nervous after investigating all of its
pluses and minuses.
Aggressive and timid investors alike can hedge risk by heeding the following five
suggestions:
Investigate before you invest. Careful research of potential investments often unearths
the small but revealing details that, if nothing else, give you a clear idea of the kind
of risk you will be taking. The greatest risk an investor can take is not knowing all the
risks.
Don't put all your eggs in one basket. In a word, diversity. Losses taken on one
investment can be offset by gains in another. An experienced financial advisor can
suggest ways to hedge risk through diversification.
Set limits, and stick to them. Against their better instincts, investors often hang on to
poor pertormers in the hopes they will bounce back given enough time. It takes discipline
to set sell limits and stick to them, but in the long run you'll come out ahead if you
do, because you'll know exactly how much you are risking before you buy.
Monitor investments and the investment climate. Be prepared to adjust your holdings when
research indicates it may be time to sell or when your own goals change. Similarly be
alert to changes predicted for the general investment environment. If respected market
analysts forecast rough weather, consider cutting your risk exposure. Conversely,
consider increasing it - in line with your own risk boundaries - when the outlook turns
favorable.
Always Match Risk to Reward. This is possibly the most important rule to remember. The
riskiest investments should offer the greatest potential for reward. If an investment
opportunity gives you the feeling that you are risking too much for too little, move on
to others that promise to compensate you more in line with your expectations.
If you start with a well-balanced, long-term investment plan that reflects your personal
tolerance for risk, you will be better prepared to ride out rough times and prosper over
the long run.