STEPS IN INVESTMENT
Undertaking an investment is a very important decision in life. Therefore all care must be undertaken to ensure the success of such an investment. There are certain things that need to be considered no mater the type of investment you want to undertake. This may be the difference between a successful investment and a failed investment venture. When undertaking an investment, the following steps need to be followed:
- Meeting Investment Prerequisite
Before you undertake any investment, the investor must make sure the basic necessities of life are met. You cannot invest your entire fund and starve to death. The investor must ensure that the basic needs of food, clothing and shelter are provided for him/her and the family before thinking of investing other than that he/she will have to sell the investment to meet these necessities. The investor can establish a savings account from which contingencies can be met. Such account should be readily accessible to avoid financial problems when the need arises. The investor can also ensure against losses such as death through accident, illness or negligence on the part of a third party, disability, loss of property through fire and theft by taking insurance policies
- Establishing Investment Goals
For an investor to be successful, he needs to establish specific investment goals and work towards achieving those goals. Without a target, the investor will not have something to work towards achieving. For example, the investor may have the following goals; accumulate 1.2 million Ghana Cedis by the end of ten years time when you go on retirement, accumulate 100 million Ghana Cedis by 2025 to build a house. In setting such targets, the investor must be sure that the target can be met considering his financial status, investments available and the return of such investments. For instance, a worker whose annual income is 2 million Ghana Cedis cannot achieve an investment target of 20 million Ghana Cedis in 5 years when the highest return of all available investments is say 15%. This is because even if he invest all his income he is not likely to get that amount. Therefore when setting investment goals, the investor should be realistic as much as possible looking at his financial standing and the returns of available investments.
- Evaluating Investment Vehicles
Once the investor has set a target, he/she must evaluate the available investment vehicles with his financial goals and select which investment vehicles that can help to achieve the set goals. The investor should therefore determine assets/investments that will be eligible. The investor then should assess the expected return over a holding period and risk associated with each investment.
- Selecting Suitable Investment
The selection process is very important because it determines a course of action. Whether the investor will be successful in achieving his/her investment goals will depend on the type of investment vehicles that were selected. When selecting an investment, the investor may have to consider not only the return and risk of a particular investment but also other factors such as tax liability and liquidity. For example a student investing to meet next semester‟s school fees should consider liquidity and risk in terms of loss of principal as very important factors.
- Constructing a Diversified Portfolio
A portfolio of investment is a collection of investments to meet a set investment goal. The investor will have to combine assets in certain proportion to form a desired investment portfolio. One factor that should be considered in portfolio construction is diversification. Diversification leads to a higher return at a possible minimum risk. The portfolio that gives the possible minimum risk is known as minimum variance portfolio. It is normally good for risk averse investors who want to get a return higher than Treasury bill’s rate. The investor can also use optimization techniques to determine investments that will be suitable for a portfolio mix. This is because certain assets on their own may be risky but when combined with other assets reduce the risk drastically. In constructing a portfolio, the investor will have to consider the co-variance of the assets that form the portfolio because co-variance determines the level of risk of a portfolio.
- Managing The Portfolio
Once a portfolio of investment has been formed, the investor must monitor the portfolio to make sure the targeted goals are met. The investor has to measure the actual returns of the portfolio in relation to expected performance. If there is deviation from the set target, the investor will need to take corrective measures. This may include selling certain investments and using the proceeds to acquire another investment or changing the portfolio mix. In certain situations, it may mean selling the entire portfolio and investing in a new set of assets altogether.