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Tuesday, May 26, 2009

Execution is Everything

If you have followed my posts over the last two months, you will now have an idea of how to allocate your investments according to your assessment of future inflation rates and your own personal profile. Once your have decided how you want to divide up your funds, you must implement your plan. What’s the best way?

It depends on the value of your portfolio. If your portfolio is small, you should certainly consider mutual funds. Otherwise, with only limited amounts available to invest, you’ll probably find it difficult to achieve enough diversification within each asset category on your own.

For example, you may be able to purchase only four or five individual stocks with the Ghana Cedis or dollars you’ve allocated to shares or stocks. The probability that the total return from these few shares will be close to the market average is far less that the possibility that the return from forty or fifty shares in a mutual fund will approximate the average.
If you have a greater amount to invest, you may want to use a discount broker or retail broker to buy shares and bonds.

Again, to some degree how you invest – whether in individual securities or mutual funds – will vary according to your own attitude towards risk and the particular investment category. It’s hard to diversify adequately with fixed-income vehicles. For instance Institutions trade some bonds heavily, and commissions are steep on bonds purchases of less than GHc10,000 (Ghana) or $50,00 (US).

But with shares or common stocks, you may achieve enough diversification with GHc10,000 (Ghana) or $50,00 (US) or less – even if you make round lot purchases (that is, purchase of 100 shares or multiples of 100 shares). Mutual funds offer the opportunity to diversify with even less money.
If your portfolio is substantial, you may want to use an investment manager to manage your money. Most reputable money managers, however, will mange portfolios of only GHc50,000 (Ghana) or $250,00 (US) of more .

Firm Foundation
You know the basics of asset allocation. And you realize that this concept is the cornerstone of a sound financial plan. Moreover, you also have a good idea of how best to diversify your own portfolio. In the subsequent posts, you will see how to make specific choices with the broad asset – allocation categories that are right for your circumstances.

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