Financial Investment Plans
Financial investment plans are contingent upon an investor's risk tolerance levels and levels of return needed. Most investors and their advisers develop plans to help afford a person's retirement. The first concern is covering the expenses of life's necessities and daily activities. But a person may have other goals, such as providing his child with an inheritance, which need covering. The investment plan is meant to develop a well-diversified portfolio that can help achieve this.
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Risk
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Each investor has a certain amount of risk that he is comfortable accepting. The risk-seeking investor likes high-risk investments, whereas the risk averse prefers safer ones. A risk-indifferent investor generally relies upon intuition or the advice of others. It is important that the individual or adviser first understand how much risk a person can tolerate. The choice of investments relies on this factor.
Return
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Return is the reward for accepting a certain level of risk. It consists of current income, capital gains, and exchange rates. Current income are dividends paid from stocks and interest paid from bonds, both received either quarterly, semi-annually or annually. Capital gains are dependent on the increase in a stock's price between purchase date and the sell date. The goals of an investor and amount of risk in an investment determine his return needs.
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Investment Policy Statement
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A financial investment plan begins with an investment policy statement. The statement outline risk tolerance levels and return requirements. It also defines any investments that the investor will not put money in, his liquidity needs, legal and regulatory constraints, the time horizon for the plan and any other circumstances unique to that investor. Liquidity is a term that financial professionals use to define cash-flow needs. A greater need for cash indicates a greater need for liquidity, which short-term investments provide.
Types of Investment Vehicles
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An investment plan also chooses from various types of investment vehicles depending on all of these factors. Fixed income securities, such as bonds, generally provide more stable income and less risk. Stocks greatly vary in the amount of risk and return they produce. Mutual funds provide an actively managed basket of stock or securities for the investor. More sophisticated investments, such as options and hedge funds, also exist. The diversification of a portfolio depends on the selection of each of these and how they offset the risk of the other investments.
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References
Resources
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