The Investment Process:

The Investment Process:
Investment process describes how an investor should go about making decision with regard to what marketable securities to invest in, how extensive the investment should be and when the investment should be made. A five step procedure for making these decisions forms the basis of the investment process.

1. Set Investment Policy
2. Perform Security Analysis
3. Construct a portfolio
4. Revise the portfolio
5. Evaluate the performance of the portfolio.

The process always starts with the investor and understanding his or her needs and preferences. For a portfolio manager, the first and often most significant part of the investment process is understanding the client’s needs, the client’s tax status and most importantly, his or her risk preferences. For an individual investor constructing his or her own portfolio, this may seem simpler, but understanding one’s own needs and preferences is just as important a first step as it is for the portfolio manager.
The next part of the process is the actual construction of the portfolio, which we divide into three sub-parts. The first of these is the decision on how to allocate the portfolio across different asset classes defined broadly as equities, fixed income securities and real assets (such as real estate, commodities and other assets). This asset allocation decision can also be framed in terms of investments in domestic assets versus foreign assets, and the factors driving this decision. The second component is the asset selection decision, where individual assets are picked within each asset class to make up the portfolio. In practical terms, this is the step where the stocks that make up the equity component, the bonds that make up the fixed income component and the real assets that make up the real asset component are picked. The final component is execution, where the portfolio is actually put together, where investors have to trade off transactions cost against transactions speed. While the importance of execution will vary across investment strategies, there are many investors who have failed at this stage in the process.
The final part of the process, and often the most painful one for professional money managers, is the performance evaluation. Investing is after all focused on one objective and one objective alone, which is to make the most money you can, given the risk constraints you operate under. Investors are not forgiving of failure and unwilling to accept even the best of excuses, and loyalty to money managers is not a commonly found trait. By the same token, performance evaluation is just as important to the individual investor who constructs his or her own portfolio, since the feedback from it should largely determine how that investor approaches investing in the future.