The Investment Process
The investment process involves determining the appropriate mix of assets for a specific goal. The goal is to maximize returns and minimize risks. The investment decisions make up a major part of a firm’s success, and the right decisions can have a significant impact on the firm’s long-term profitability. The decisions involved in the investment process are highly critical and often involve large amounts of capital. The decision-making process should be done carefully and with caution.
A good investment process begins with idea generation. The process of idea generation should be continual and can be accelerated by attending buyside investment conferences. Being able to recognize opportunities early is far more important than sifting through opportunities, especially in a global opportunity set. After recognizing a potential investment, a thorough due diligence process can be performed and the potential investment’s merits documented.
Once the investment process has been established, the next step is to understand the client’s risk appetite and financial situation. From there, an investment process involves defining the investment objective and determining asset allocation, including stocks, debentures, bonds, real estate, options, commodities, and more. This process allows the investor to create a diversified portfolio, while tracing the different investment strategies back to their underlying principles.
Investments require a certain level of risk, and the money invested may not recover. This means that the investor may not receive a profit if the market declines. In addition, the investment process will involve risk, and it is possible that the investor may lose his/her principal in the process. This is the reason why asset allocation is so important.
It is also important to monitor the performance of the portfolio. If an asset is underperforming, investors should consider rebalancing. This means adding more assets or removing some to maintain an appropriate level of risk and return. Rebalancing will allow the investor to maintain a healthy balance among all assets in their portfolio.
Investing in fixed income involves risks. For example, investments in a bond can have a lower value than their original cost, if the interest rates rise. If a bond is issued by a government entity, the interest rate will likely increase. It is important to consider the risk before investing in a bond, and understand what it means.