Steps involved in investment planning

Investors like to invest through the instinct and want to gain profit from the market by investing. However, while financial institutions are undoubtedly a part of the process of investing. As investors, it is not surprising that we focus so much of our energy and efforts on investment philosophies and strategies, and so little on the investment process. It is far more interesting to read about how Peter Lynch picks stocks and what makes Warren Buffett a valuable investor, than it is to talk about the steps involved in creating a portfolio or in executing trades. Though it does not get sufficient attention, understanding the investment process is critical for every investor for several reasons:

  1. Investment planning centrally depends upon the portfolio of the investor; as a result the primary step of the investment process is to make a portfolio. By emphasizing the sequence, it provides for an orderly way in which an investor can create his or her own portfolio or a portfolio for someone else.
  2. The investment process provides a structure that allows investors to see the source of different investment strategies and philosophies. By so doing, it allows investors to take the hundreds of strategies that they see described in the common press and in investment newsletters and to trace them to their common roots.
  3. The investment process emphasizes the different components that are needed for an investment strategy but strategies that look good on paper never work for those who use them.

Steps involved in investment planning

Investment is not only prediction it has its own reasons behind every up and down in the market. So it is has its own theory to move in particular directions. To get in to the market investors must go through the following process.

  • Analysis and profiling of the instrument: – The first step is performing a Need Analysis check. The requirements and expectations of the investor should be met by the instrument. During the profiling investor should consider their age, their profession, the number of dependents, and their income. By doing this check, the risk profile of the investor should be designed.
  • Evaluating the alternatives: – The next step would be revaluating the needs. Other investment instruments and options should be analyzed. The risk-return profile of investment products is evaluated in this step. Every investment product varies according to its return potential and riskiness. Investment products giving a high rate of return are generally risky and volatile. The products giving a lower rate of return usually are less risky.
  • Analyse the Profile: – The next step would be analyse the risk-return profile of the investor on to the investment portfolio. The investment instruments are matched with the risk-return profile of the investor. All the investment alternatives that offer expected rate of return are evaluate for consideration.
  • Preparing an Optimum Portfolio: – Then according to the risk appetite and return pattern an optimum portfolio is designed for the investor. The basket of investment instrument selected in the previous step are given due weightage and appropriate amount of money is invested in each of the investment avenue so as to get maximum return with minimum possible risk.
  • Consistent Monitoring: – Finally a continuous watch on the portfolio is extremely important. Fundamental analysis of the investment products done in the previous stages would only help in selecting the right product but the right time of entry or exit from a particular stream is evaluated by doing a technical analysis. For this professional portfolio management is a must.

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