Developing an Investment Strategy
By Saghir Aslam
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
Many people approach investing in a haphazard manner, purchasing individual stocks and bonds, but never really deciding how to structure their overall investment portfolio. With no strategy to guide purchases, these portfolios can contain investments that are inappropriate for the individual's circumstances. Thus, to help guide your investment decisions take time to develop an investment strategy by following these steps:
1. Identify Your Financial Goals. This will help you determine how much money you need to accumulate and how long you have to do so. Your need for liquidity, desired return, current income needs, portfolio size, tax situation, age and investment period can all have a significant impact on which investments are appropriate. For instance, funds that will be needed in a couple of years should be invested differently than funds that won't be needed for 20 or 30 years.
2. Review Investment Alternatives. Don't confine yourself to currently owned investments. Investigate all options, including cash equivalents, bonds, stocks, real estate, and other choices. Make sure you understand the basic aspects of each, examining the types of risk they are subject to as well as their historical rates of return.
3. Assess Your Tolerance For Risk. Everyone has a different risk tolerance-some people can't stand the thought of losing any of their principal while others are comfortable with this concept if it means they can possibly increase their rate of return. Make sure you understand the potential downside as well as the upside to any investment.
4. Decide On An Appropriate Asset Allocation Mix. Decide what percentage of your portfolio should be allocated to stocks, bonds, cash equivalents, and other alternatives. Within these broad categories, make allocation decisions for each category. For instance, within the stock category, you can select large capitalization stocks, small capitalization stocks, and/or international stocks. (International investing has additional risks associated with it and may not be for everyone.) Each individual's asset allocation strategy will vary based on individual circumstances. In addition, your strategy is likely to change over time as your personal situation changes.
5. Compare Your Current Investment Portfolio To Your Desired Asset Allocation. Calculate how much of your current investment portfolio is invested in each category. Take a fresh look at each investment you own, making sure the reasons you initially chose to invest still remain valid. At this point, determine what changes need to be made to your portfolio to bring it in line with your desired asset allocation. If major changes are required, you may want to make them over a period of time.
6. Monitor Your Portfolio Periodically. To ensure that your investment strategy stays on track, review your portfolio at least annually, making adjustments as needed.
Developing an investment strategy requires evaluating many factors, but can give you a well-thought-out strategy to help achieve your long-term goals. Hopefully, it will also allow you to maintain your commitment to your strategy during your periods of market volatility. If market volatility starts to make you nervous, review your written reasons for investing as you did. That reminder should help keep you focused on the long term.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr. Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, or does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr. Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr. Aslam does not have anything for sale.)