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The previous sections have been successful if they have helped you put personal financial management into perspective. These sections have taught you to live on a budget, keep track of where your resources are going, manage your cash and cash equivalents wisely, protect yourself from loss by owning insurance, and make big-ticket purchases wisely. Now we begin a discussion on long-term investing.

Please be aware that this class approaches the subject of investments differently than other textbooks approach this subject. Most books take an asset-based approach: in other words, they talk about stocks, bonds, mutual funds, and other assets. These assets will change over time as new assets are developed and sold. I will take a principles-based approach to discussing investments because the principles will not change over time.

The most critical part of investing is having a plan—an investment plan. This series’ sections on investing all relate to putting together an investment plan, often called an investment policy statement. This investment plan describes what kind of an investor you are, what your risk and return requirements are, how you will invest, what you will invest in, how you will get money to invest, and how you will evaluate your investments. These are all critical areas of the investment process.

Teaching investments is really learning about six important questions. The questions are:

 1. What are financial markets and how do they work? It is important that you learn the basics of financial markets and financial market operations before you begin investing.

2. What are the major asset classes and what are the differences in risk and return between them? Asset classes, such as stocks, bonds, cash, etc., have different risk and return characteristics. Since investment returns are largely the result of an investor's asset allocation and since asset allocation is based on an investor's risk tolerance, understanding this important decision is critical.

3. What are the major financial instruments or assets and what are their advantages and disadvantages, i.e., risks? Learning about financial assets is important to investing

4. What is your asset allocation? Your asset allocation is the way you allocate your investment dollars to stocks, bonds, cash, etc.

5. What are your investment guidelines and constraints? Investment objectives, guidelines and constraints are the factors that influence how you will invest, what you will invest in, and any other guidelines to help you be a better investor.

6. How will you build and monitor your portfolio? This is the process you will build, monitor, and rebalance your portfolio.

I have divided this section on Investments into nine different sections. Investments 1 will discuss principles of successful investing and give a basic history of asset class performance over the last 80 years. It will also help as you develop your preliminary asset allocation targets. Investments 2 will discuss objectives, constraints, and policies. Investments 3 will discuss financial markets and how they operate. Investments 4, Investments 5, and Investments 6 will discuss the major asset classes and financial assets in even more detail. Investments 7 and Investments 8 will discuss how you build your portfolio and how you choose financial assets. Finally, Investments 9 will discuss how to monitor and rebalance your portfolio.

When you have completed this section, you should be able to do the following:

  1. Know the steps you should take before you invest.
  2. Recognize the ten principles of successful investing.
  3. Understand the risk and return history of the major asset classes.
  4. Understand the risks and return history of the major asset classes.

Properly prepare yourself to invest and understand what you will be investing in before you begin your investment program; these are important keys to success.


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