Any investor who sincerely works to make the most of the current market trend will never underestimate the importance of a pre-set investment strategy before investing. The investment environment is becoming increasingly complex and encompasses different types of marketable securities. Nevertheless, the importance of a well-defined and appropriate investment strategy cannot be underestimated.
The investment strategy determines the way in which the investor must deal with the choice of securities in which to invest. This is a basic guide to where to invest, when to invest and how much to invest. There are five important steps in the investment process that should not be overlooked. They are:
1. Defining investment strategy / policy
2. Analysis of securities
3. Build a portfolio to minimize risk
4. Evaluate the effectiveness of the portfolio and
5. Portfolio review
The investor cannot define his investment strategy unless he defines his investment goal and his investment surplus at his disposal. The purpose of “making more money” is very unclear. Of course, everyone wants to make more money! The objectives must be clearly defined in terms of risk and return. Understanding the relationship between risk and return will go a long way in building a portfolio that can provide optimal returns for the amount of risk an investor can take.
An often overlooked aspect of choosing an investment location is individual tax status. There is no point in a tax-exempt investor investing in government securities or other tax-exempt options.
The second step of the securities analysis allows the investor to distinguish between undervalued and overvalued shares. Return can be maximized by investing in stocks that are currently undervalued but have the potential to increase (be sure to buy a low selling high). There are two approaches used for securities analysis; Technical analysis and fundamental analysis.
The technical analysis includes the study of trends in stock price movements. Technical analysts argue that by studying recurring trends and patterns in price movements, it is possible to predict short-term price movements. This is based on the assumption that price trends and patterns are repeated.
On the other hand, fundamental analysts believe that intrinsic value is equal to the present value of all cash flows that a firm expects to earn in the future. Therefore, the present value is calculated by forecasting the time and amount of future cash flows and discounting them by applying an appropriate discount rate. The share is considered undervalued and it is worth investing in it only if this intrinsic value is reasonably less than the current market price of the share. This is based on the belief that incorrectly valued stocks will be adjusted by the market at some point in the future and that undervalued stocks will be valued and overvalued stocks will be depreciated.