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How to Manage Your Investment Risk

Cash Flow Analysis

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HOW TO INVEST

Common Investment Mistakes or Poor Investment Decisions?

  1. Concentrated Positions
  2. Hot Tips
  3. IPOs: Initial Public Offerings
  4. Emotions
  5. Analyst Credibility
  6. Garbage In Means Garbage Out

  7. Buying an Index Fund

  8. Avoiding Unnecessary Taxes

  9. Avoid Banks or other Savings institutions

  10. Procrastinating

Diversification vs. Asset Allocation-Managing Investment Risk
  1. Types of Risk
  2. Blind Diversification vs. Strategic Diversification
  3. Asset Allocation

Cash Flow Analysis

Bonds

Dollar Cost Averaging

Portfolio Management

Hope for the Best but Plan for the Worst

  1. Wills and Trusts
  2. Proper Insurance

Summary

  1. Suggestions
  2. Final thought
 		To avoid assuming unnecessary investment risk, determine the current rate of return necessary to achieve your future financial goals.  Start by estimating the future income you will need to fund your goals such as a desired lifestyle during retirement or your child’s education (i.e. $3,000 per month).  Then estimate the future value of your portfolio necessary to adequately and safely generate the income you desire.   

Example:  If your future income goal was $3,000/month and you anticipate a yield of 6.5% can be generated from a safe investment (i.e. government treasuries) during that future period, the future value of your portfolio would need to be approximately $553,847 to generate your desired monthly income. 

Once the future value is estimated, determine the value (present value) of your current portfolio.  Factor in any periodic investments (payments) you intend to make between now and the time you reach your goal.  With this information, you can determine the rate of return necessary to achieve your future value goal.  Remember to factor in the cost of inflation into your projection.  You may find the rate of return you need to accomplish your future goals is less than the return you are currently attempting to attain.  You can effectively reduce unnecessary risk by constructing a diversified portfolio with assets that are inherently less risky.

 

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