Securities - How To Succeed In The Stock Market?

It is the very trait of the securities markets to move backward and forward from one end to the other depending on the popular frame of mind and in such times, those who can part reason from sentiment can mark opening.

Well, there is a response in one of the proven portfolio investment line of attack - Asset Allocation/portfolio management. What is asset allocation? How does it work? How does it help an investor to invest opposing to the stock market?

Portfolio Management is the scientific process of separating all your money across various non-correlated asset classes. In simple terms, if your money is allocated between, bonds and, you have taken the first step.

One may consider various other investment options like property or gold but as they don’t have an direct impact on stock exchange, therefore, we would not discuss that at present in this article. The second stride is to know how much money should be allocated in which of the options. Now this is a function of two things, the investment alternative has certain traits or uniqueness and the investor has certain financial objective as well as certain risk hunger.

This risk appetite is again a function of one’s needs as well as mental ability to handle the unexpected. The science of asset allocation tries to put together a portfolio that matches the traits of the assets with the requirements of the investor.

There is a mixture of approaches to take on by different advisers to build portfolios for their clients largely keeping the clients’ needs in mind. We will not get into the discussion of the same here since the result would be different for different investors since their requirements would be poles apart from one another.

Let us come back to the argument of what asset allocation can do and how it can help investors. We will try to keep it very easy only for the rationale of understanding. The actual portfolios or the realistic approach cannot be so straightforward.

Let us assume that after evaluating the needs of one of the customers, the consultant recommends investment of 700% of the assets in an equity mutual fund and 30% in a money market mutual fund.

The shareholder and the consultant then make a decision to appraise the performance of the portfolio every six months. The review process is also very simple. The objective would be to maintain the allocation between equity fund and money market fund at 70:30.

Given that the stock prices are volatile over shorter terms and move in line with the profits of the company over longer phase, we are likely to see the value of the equity mutual fund go up and down over time. When that takes place, the asset allocation would stray from the 70:30 that was set in the beginning.

When the equity prices move up faster than the debt prices, the allocation will get skewed in favour of equity and our review process would restore it back to 70:30 by shifting some money from equity fund to debt fund. In the other case, when the equity prices move adversely, the balance would get skewed towards debt and the balance can be restored by shifting from debt fund to equity funds.

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In realism, the shareholder may get inflows, which require to be invested in the portfolio or have a need to take some money out of the investments. In such cases, at the time of investment or redemption, the investor has to look at the current market value of the equity fund and debt fund and rebalance the portfolio to 70:30.

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Tag: securities

[tag]securities, portfolio investment ,stock market,stock exchange,equity, share,[/tag]

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