Many investors buy stocks with no clear investment objectives in mind, in a bearish season, it is such investors that are worst hit. Can you imagine an investor putting all his money in penny stocks or just banking stocks? These are good examples of bad portfolio management. Why a lot of investors have been currently hit by bearish run in the market within the past few months is a lack of good portfolio planning and structuring.
But I also believe that the current states of prices in the market will give you a good opportunity to have a rethink on some positions you have taken and also buy into stocks that are currently cheap. Do you even know that there are times that it will be better for you to hold your cash instead of investing in stock market because of a downturn in the market? This is what portfolio planning will help you to achieve.
BUILDING YOUR PORTFOLIO
The following questions will help you in creating investing objectives and also help you in knowing how to diversify your investments among quoted stocks, public offers, private placements, bonds and cash. Ask yourself these questions before investing at any time:
1) How soon will you need to draw upon your investments? The longer your time horizon, the more weight you should give to stocks. With time on your side, you can afford to ride out the occasional downward movement in stocks. On the other hand, if you expect to begin drawing on your investments in the intermediate or short term, you should consider shifting your emphasis to income and safety.
2) How concerned are you about inflation? The greater your concern, the more you should invest in quoted stocks. Beating inflation is one of the benefits that stock investments have over other instrument like fixed deposit or government bonds. If you had kept your money in a fixed deposit account yielding a 10 percent return since 1980 by 2006 the value of that investment will have been eroded because our inflationary rate has been measured above 10%.
3) How important is that your investments not drop significantly in value? If wide price variations are likely to keep you up at night, you should be emphasizing bonds and blue chip stocks. Basically, we have two types of investors; the risk takers and the risk averse. A risk taker is not really affected but short term fluctuations in stock prices and he can also invest in highly volatile stocks like penny stocks but if you are a risk averse investor, I will advise you to concentrate on those blue chip or income stocks which rate of volatility is very low. In that category, you will find the likes of first Bank, Guinness, Mobil, Total, UBA and some others.
4) Are your investments a source of emergency funds? If your funds will be needed within a very short term, a cash reserve is a good idea for emergencies, so you don't have to sell your stocks at a loss during bearish market conditions. Cash reserves may come in form of a term deposit which you can arrange with your banker or through treasury bills which matures in thirty to ninety days.
It's important not to take your investment planning for granted. Once you have decided on a strategy, give it an annual check up, to be certain that you are staying on course.
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