The Basics of Investment Management

 Investments can be very confusing because it seems that every stock broker or investment advisor has a great investment opportunity to share with you.  Investing is and should be VERY boring.  The more excitement you have, the less you are investing and the more you’re speculating or even gambling in an effort to make money.

The most important point to remember with investing is that one must determine the purpose of the money being invested before one chooses how to invest. For example, let’s say that you wanted to save for a downpayment on a home in 3 years. There is a proper type of investment for that purpose. It would be something that would have stability of principal, high liquidity and low interest, such as a money market or certificate of deposit. On the other hand, if you are investing with the purpose of creating a retirement income stream 20 years from now, the type of investment would be much different. It would have some volatility, lower liquidity and higher potential returns, such as equities, bonds, real estate, annuities and life insurance. When you have the intention of placing money aside for future use, always decide on the purpose first and then invest in the appropriate manner to achieve that purpose most effectively.

The only time people have a problem with investments losing value is when the investment purpose changed. For example, if someone was investing in equities for the purpose of retirement income in 20 years, and decided to cash in the account due to a market recession, losses would be realized because the person did not allow for the volatility that is inherent in equities over that time frame. It is not the market that is the problem, it is the changing of the purpose mid-stream.

A PRUDENT INVESTOR WILL CAREFULLY CONSIDER HIS GOALS IN RELATION TO THE BENEFITS OF EACH OF THE ASSETS IN HIS PORTFOLIO. SOME OF THE MORE COMMON FEATURES DESIRED IN AN INVESTMENT PORTFOLIO INCLUDE: 

• LIQUIDITY: The ability to readily convert an asset to cash.
• GROWTH: To provide an inflation hedge and assure capital for retirement or other future needs. Remember, retirement is for a lifetime. 
• INCOME: To meet current living expenses as a supplement to wages or retirement plans.
• TAX ADVANTAGES: In the form of tax-deferred growth, tax-free or tax- advantaged income, tax credits, or excess deductions that can be used to offset current taxable income.
• PROFESSIONAL MANAGEMENT: You should have professional management at 2 levels; at the source of the investment and to position the investment to match your individual risk tolerance.