Generally I give an information that to be successful with any investment strategy, so we have to begin with an investment philosophy that is consistent at its core and which matches not only the markets you choose to invest in but also your individual characteristics.
What is an investment?
An investment philosophy is a coherent way of thinking about markets, how they work and the types of mistakes that you believe consistently underlie investor behavior. Why do we need to make assumptions about investor mistakes? As we will argue, most investment strategies are designed to take advantage of errors made by some or all investors in pricing stocks. Those mistakes themselves are driven by far more basic assumptions about human behavior. To provide an illustration, the rational or irrational tendency of human beings to join crowds can result in price momentum – stocks that have gone up the most in the recent past are more likely to go up in the near future. Let us consider, therefore, the ingredients of an investment philosophy.
How can we View Market Efficiency:
A closely related second ingredient of an investment philosophy is the view of market efficiency or its absence that you need for the philosophy to be a successful one. While all active investment philosophies make the assumption that markets are inefficient, they differ in their views on what parts of the market the inefficiencies are most likely to show up and how long they will last.
Why do we need an investment philosophy?
Most investors have no investment philosophy, and the same can be said about many money managers and professional investment advisors. They adopt investment strategies that seem to work (for other investors) and abandon them when they do not. Why, if this is possible, you might ask, do you need an investment philosophy? The answer is simple. In the absence of an investment philosophy, you will tend to shift from strategy to strategy simply based upon a strong sales pitch from a proponent or perceived recent success.
There are three negative consequences for our portfolio:
a.Lacking a rudder or a core set of beliefs, you will be easy prey for charlatans and pretenders, with each one claiming to have found the magic strategy that beats the market.
b.As you switch from strategy to strategy, you will have to change your portfolio, resulting in high transactions costs and you will pay more in taxes.
c.While there may be strategies that do work for some investors, they may not be appropriate for you, given your objectives, risk aversion and personal characteristics. In addition to having a portfolio that under performs the market, you are likely to find yourself with an ulcer or worse.
Find Modes of Investing:
This is a process that we all follow – amateur as well as professional investors - though it may be simpler for an individual constructing his or her own portfolio than it is for a pension fund manager with a varied and demanding clientele.
Step 1: Understanding the Client
Step 2: Portfolio Construction
Step 3: Evaluate portfolio performance
The actual construction of the portfolio, which we divide into three sub-parts.
1.The first of these is the decision on how to allocate the portfolio across different asset classes defined broadly as equities,
2.The second component is the asset selection decision, where individual assets are picked within each asset class to make up the portfolio.
3.The final component is execution, where the portfolio is actually put together. Here investors must weigh the costs of trading against their perceived needs to trade quickly..
The final part of the process, and often the most painful one for professional money managers, is performance evaluation. Investing is after all focused on one objective and one objective alone, which is to make the most money you can, given your particular risk preferences.
For all the above are the short look of the portfolio and the students must have a knowledge in that area, for getting knowledge in that area the students should read which content was given.
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