Making wise investment decisions requires following a systematic investment process. An investment process flow chart provides a visual representation of the key steps involved in portfolio management. Understanding the investment process flow will help investors make informed decisions aligned with financial goals. This article will illustrate the investment process flow chart with a step-by-step breakdown.
Setting investment objectives and constraints
The first step in investment process is setting clear investment objectives and constraints for the portfolio. Investment objectives may include target rate of return, risk tolerance, time horizon and liquidity needs. Constraints refer to limitations such as legal and regulatory factors, tax concerns and unique circumstances of the investor. For example, a retired individual may seek moderate growth and stable income from investment portfolio. The constraints could be low risk tolerance and need for regular cash flows.
Formulating asset allocation
Asset allocation involves deciding how to distribute capital among different asset classes like stocks, bonds and cash equivalents. It depends on factors like investment objectives, risk appetite, time horizon and market conditions. For instance, a young investor with high risk tolerance may allocate 80% to stocks, 15% to bonds and 5% to cash. Asset allocation aims to maximize returns within acceptable risk levels.
Selecting investments
This step focuses on selecting specific investments within each asset class. Investors can pick individual securities like stocks and bonds or choose mutual funds and ETFs. Selection criteria may include fundamentals like earnings growth, valuation, credit quality etc. Active portfolio managers try to beat benchmarks by stock picking while passive investors buy index funds tracking market indices.
Constructing portfolio
The next stage is constructing an optimal portfolio using the selected investments. The aim is to achieve proper diversification consistent with desired asset allocation and risk profile. Investors must avoid overconcentration in any single security or sector. The portfolio must be periodically rebalanced to account for market movements and maintain target allocations.
Monitoring and revising
This final step closes the loop in investment process. Portfolio performance must be periodically evaluated relative to suitable benchmarks. Fundamentals, valuations and client circumstances should be monitored to determine if portfolio changes are required. As goals or market conditions change, the investor must revisit asset allocation and portfolio holdings.
An investment process flow outlines the key steps of setting objectives, asset allocation, security selection, portfolio construction and monitoring. Following a disciplined process helps align investments with financial goals and risk appetite.