The Basics of Investment Management

Asset

Asset management stands as the building block of any great financial plan and investment experience. In order to proceed with the issues of wealth growth, it is necessary to know the basics. In this section, let’s discuss some important financial goals, basic pillars of investment – risk and return, and diversification, and the most important categories of investment.

Understanding Financial Goals

All investment management starts with goal identification to enable individuals to achieve their financial objectives. Lack of goals makes the management of investments quite a complex endeavour. Financial goals typically fall into two categories:

Short-term vs Long-term Goals

Short-Term Goals
Short-term goals are objectives that you aim to achieve within one to five years. These include:

  • Building an emergency fund.
  • Saving for a vacation or a down payment on a car.
  • Covering unexpected medical expenses.

The liquidity of the investment is also important where the investments meant to meet short term objectives are safer than those meant for the long term goals. High interest savings, money market funds, other deposits (certificates of deposit, CDs), and short-term treasuries or notes.

Long-Term Goals
Long-term goals extend beyond five years and often include:

  • Retirement planning.
  • Saving for children’s education.
  • Purchasing a home or building wealth for future generations.

Due to the long-time horizons long term investment, they can afford to embrace certain levels of risks with a view of earning higher profits. Such goals are achieved by investing in equities , real estates or mutual funds among others.

There is always a clear division between short term and long term objectives, when dealing with investments, its possible to have a unique plan suited for your own needs and expectancy.

Key Concepts: Risk, Return, and Diversification

Investment management revolves around three fundamental principles: which are risk, return and diversification. Knowledge of such ideas is crucial when designing a defensive investment portfolio.

Risk
Risk means the probability of an investment losing value, or performing below a certain level. Every investment has its measure of risks, yet learning your risk appetite will guide your chosen venture.

Return

Profit or income, which is realized on an investment, is known as return. It is sometimes expressed in reference to the first dollars invested, usually as a percentage figure. It is always the case that higher return tends to be associated with higher level of risk. This is one of the most important factors of managing an investment portfolio and refers to the familiar risk/return tradeoff.

Diversification

Portfolio diversification is a concept that involves an investment strategy of having a number of assets in different classes so that benefits from one investment can offset losses from other investment. When one investment is going south the money you invested in other stocks is soaring high hence acting as a buffer. For example:

When an investor optimizes these three functions, it becomes possible to develop a portfolio that meets one’s finance objectives as well as tolerance to risks

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