2. Determine the appropriate asset allocation
3. Select investment vehicles and implement strategy
a. Taxable or tax free
b. Active or passive
c. Mutual funds, individual securities, or others
d. Market timing
4. Monitor portfolio, reevaluate goals and constraints and rebalance
a. Rank performance
b. Reevaluate goals and constraints
c. Rebalance portfolio
5. Document your results
Other Investment Process Links
Asset allocation is the most important part of the investment process because it will likely determine the majority of both risk and return for your portfolio. (See Asset Allocation.) Here are some calculators that will recommend an asset allocation of stocks, bonds, and cash for your portfolio based on your inputs. Some recommend allocations to other assets (international assets, real estate, etc.) that you should also consider for a portion of your funds. Don't be surprised if you get different results from different tools. There are no absolutely correct answers based on the limited information you can supply.
- Kiplinger's Risk Tolerance will project your equity %
- Janus's Asset Allocation
- TIAA-CREF's Asset Allocation Evaluator.
As Charles Ellis points out "The priority objective in investment management is to control risk." Generally, the more risk averse you are, the more you should diversify. See Managing Risk Through Diversification from TRowePrice. The best allocation of assets will depend on the expected returns, volatility, and correlation between assets. The objective is to achieve the highest return given an acceptable level of risk, or alternatively to assume the minimum risk required to achieve a specific amount.
For more in depth learning about investing theory, asset allocation, and efficient portfolios, there are a number of excellent sources available on the web. An Introduction to Investment Theory by Yale professor William Goetzmann, The Intelligent Asset Allocator: Portfolio Theory For the Small Investor by William J. Bernstein, Frank Armstrong's A nibble from the free lunch about Modern Portfolio Theory and risk management, Travels on the efficient frontier about asset allocation and diversification, and The Asset Allocation Decision.
Once you've determined your asset allocation, you can choose Benchmarks which you'll use later to evaluate your results and determine how well your investments have done.
Last update 4/27/2010. Copyright © 2010 Investor Home. All rights reserved. Disclaimer