An investment process flow chart visually depicts the key steps involved in making investment decisions. It serves as a guide for investors to systematically research, analyze, select, and monitor investments to meet their financial goals. A typical investment process includes defining investment objectives, asset allocation, portfolio construction & selection, execution, and monitoring & rebalancing. Understanding this step-by-step framework is crucial for long-term investing success.
Set clear investment goals and constraints based on risk appetite
The first step is to clearly define your investment goals, time horizon, and risk tolerance. This involves outlining your return objectives, liquidity needs, tax considerations, legal requirements, and any other unique constraints. For example, a 30-year old just starting to invest may have a high risk tolerance and focus more on long-term capital appreciation, while a 60-year old nearing retirement will prioritize capital preservation and regular income.
Determine optimal asset class allocation targets
The next key step is strategic asset allocation (SAA) based on your investment profile. This involves allocating capital across various asset classes like stocks, bonds, real estate, etc. A young investor may allocate 80% to equities given the long time frame, while a retiree may reduce this to 40-50% and shift funds to fixed income for stability. Tools like Monte Carlo simulations can model the risk-return tradeoffs to arrive at an optimal SAA.
Research and select specific investments vehicles
Within each asset class allocation target, specific investment securities like individual stocks, ETFs, mutual funds need to be researched and filtered down to a final portfolio. Criteria like past performance, volatility, fees, liquidity are assessed to select attractive investments aligned to your goals.
Construct and implement optimal investment portfolio
The investments selected across various asset classes need to be bought and combined into a total portfolio view. The relative weights and correlations between securities is analyzed to create a diversified, risk-optimized portfolio. Positions are sized appropriately and trades executed to construct this portfolio.
Monitor portfolio and rebalance when necessary
Finally, once the portfolio is implemented, it needs to be continually monitored and performance tracked against suitable benchmarks. As market conditions evolve and asset values fluctuate, periodic rebalancing is required to bring allocations back in line with targets.
In summary, establishing clear investment objectives, allocating across asset classes, selecting securities, constructing an optimal portfolio, and ongoing monitoring are the key stages in an investment process flow chart. Understanding this methodical framework helps guide informed decision making.