5 main topics Investors should be aware of Financial planning
1. Financial planning
2. Investment analysis
3. Risk assessment
4. Portfolio structuring
5. Performance evaluation
1.Financial planning – Without a financial plan, there is no necessity for either market analysis or risk assessment. Financial plans can be developed at any stage of life, however before making a plan we should gather personal income statements and balance sheets in order to help determine what assets will provide a desired rate of return vs. risk. Each plan should vary with different stages of life. Younger people should strive to increase assets!!! Older people should strive to maintain assets and decrease risk…
2. Investment analysis – the ultimate defense against the many unknowns that influence prices in the marketplace, without both macro and micro considerations of the impact of the dynamic economic and fundamental environment. Investors are at the mercy of a multitude of unknowns that can adversely influence investments.
a. Fundamental analysis – Helps determine the underlying value of the company and assures us of its financial soundness. At the point of determining a solid company, we must find good entry and exit points. https://www.investopedia.com/terms/f/fundamentalanalysis.asp b. Technical analysis – financial analysis that uses patterns in market data to identify trends and make predictions. https://www.investopedia.com/university/technical/ c. Economic analysis – provides insight into how markets operate, and offers methods for attempting to predict future market behavior in response to events, trends, and cycles.
3. Risk assessment – a core ingredient in determining reasonable objectives. In the absence of a risk assessment plan. Structuring a portfolio becomes an exercise in futility.
a. Types of risk: market risk is systematic risk (macroeconomic) bear/bull markets in the business cycle. Unsystematic risk or security risk (microeconomic) risks stocks in price wars etc. The best defense against unsystematic risk is diversification. This basically means, to decrease risk, invest in 15-20 stocks varying in industries. https://www.investopedia.com/walkthrough/corporate-finance/4/return-risk/systematic-risk.aspx
b. Beta/Alpha risk. Stock/Market return. https://www.investopedia.com/ask/answers/102714/whats-difference-between-alpha-and-beta.asp
4. Portfolio structuring – This is the first step toward executing carefully executed financial plans.
Here we have to ask ourselves some questions: what do I want? What can I afford to lose? As younger people we can take on higher risk structuring. Historically the stock market has achieved the highest returns of all “investment” vehicles. The “” are there because the stocks are not investments, they are speculations because they do not have a guaranteed return.
Stocks – Cash – Securities…These make up our portfolios. Personally I like stocks and options because I am young and striving to increase assets. Ergo, I choose to speculative higher risk portfolio structuring. I dislike having more than $3k liquid cash (emergency money) on hand but there is a work around to this problem through broker debit cards which allow settled funds to be withdrawn exactly like funds in a bank account.
5. Performance evaluation – Involves constantly reviewing results and comparing them to stated objectives. If the rate of return does not meet the desired rate, the plan should be adapted to meet the investors goals.
Here we must: Know our financial plan and goals, Analyze the business cycle to determine where were at. Based on what investment vehicle our money’s in, the stage of the business cycle and our goals we can evaluate variables to reassess variables and create an educated evaluation of our portfolios.
Incorporating all five basic aspects of investing will help us all achieve investing enlightenment in light of a chaotic environment. This foundation of knowledge will help us as investors walk the straight and narrow, understand and properly evaluate risk, and save our hard earned money for the betterment of ourselves and our loved ones. I urge everyone who reads this to take heed to these five aspects and educate yourselves before throwing money into the wall street shark tank.