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Individual investors Making Investment Decisions

This assignment is concerned with your understanding of the key issues relative to portfolio analysis and investment. In completing this assignment you are to limit your scope to the US stock markets only. Use the Library, the Internet, and course resources to write a 2-page essay which you will use with new clients of your financial planning business; the essay should address the following issues and/or practices:

How individual investors make investment decisions in practice rather than in theory; and
How investors manage their funds/savings/ investments in light of current stock markets.

In your response, build upon extant portfolio theory and make sure to talk about different types of risks that investors might face and how they go about managing such risks. This means you need to consider topics such as efficient frontier and optimal portfolios; as well their relevance to investment theory. Furthermore, given the nature of the assignment, avoid bringing the brokerage industry into your discussion. In other words, assume you can invest directly in the stock market and do not need any financial intermediaries like brokerage houses.

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Managing investments is a very serious matter, which can lead either to huge profits or to huge losses. One should invest so that your money grows and shields you against rising inflation. The rate of return on investments should be greater than the rate of inflation, leaving you with a nice surplus over a period of time. Whether your money is invested in stocks, bonds, mutual funds or certificates of deposit (CD), the end result is to create wealth for retirement, marriage, college fees, vacations, better standard of living or to just pass on the money to the next generation. Also, it's exciting to review your investment returns and to see how they are accumulating at a faster rate than your salary.

How individual investors make investment decisions in practice rather than in theory; and
How investors manage their funds/savings/ investments in light of current stock markets.

Factors for the choice of asset allocation/investment decision

The amount that you invest will eventually depend on factors such as:

Your risk profile

Your Time horizon

Savings made

The investment options before you are many. Pick the right investment tool based on the risk profile, circumstance, time zone available etc. If you feel market volatility is something which you can live with then buy stocks. If you do not want to risk the volatility and simply desire some income, then you should consider fixed income securities. However, remember that risk and returns are directly proportional to each other. Higher the risk, higher the returns.

Begin with an understanding of yourself.

What do you want from your investments?
It could be growth, income or both.

How comfortable are you to take risks?
It's only human if your first reaction on an adverse market movement is to sell and run away. To shield yourself against short term trading risks one has to take a long-term view. Renowned experts such as Benjamin Graham and Warren Buffet rarely shuffle their portfolio unless there is some change in the fundamentals of a company. Once you see the kind of returns you can generate over time, you'll come to realize that it really doesn't matter if your stock drops or rises over the course of a few hours or days or weeks or even months. Mutual funds are a good way to begin investing in the stock market. Funds render investment services with professionalism and give a good diversification over many sectors. If volatility is not your cup of tea, then you might consider buying fixed income securities.

Planning and Setting Goals: Investment requires a lot of planning. Decide on your basic framework of investments and chart your risk profile.

Ask yourself: What is the investment "time horizon"? Time horizon is the time period between the age at ...

Solution Summary

This solution of 1,802 words looks at portfolio analysis and investment and how investors making investment decisions in practice rather than in theory and how they manage their funds, savings, and investments in the current stock markets. All references used are included.