Question

"Investors and the Investment Process" Please respond to the following:

• Determine two ways in which a top-down investment policy can help with one’s investment strategy. Provide two examples to support your response.
• Determine the importance of monitoring one’s portfolio when engaging with investment diversification. Support your position.

Answer 1

Answer: Top-down Investment policy- It is an investment policy from broader to narrow aspect.This strategy looks macro economic picture first. In this strategy, analysts first analyze the industry as it whole and then the company. Firstly industry analysis is done.

Factors affecting industry are-

• Fiscal and monetary policy.
• International markets
• Demand and supply of raw material in a particular industry.
• Inflation
• Trade balances
• Gross domestic product

Examples:

Top down approach provide benefits to investors. If investors analyse the industry thoroughly and factors affecting industry in which, they are going to invest, they can reduce their risk, Systematic risk is the market risk that cannot be reduced through diversification but it can be reduced if we know the current industry conditions. Investors can buy sector specific stocks if that particular sector is doing well and will do good in the future as well.

If Investor wants to invest into an oil company but current industry conditions are not favorable for oil companies due to higher price of crude then he will not invest into oil company right now.

Answer(2): Diversification- It is an art of minimizing risk by investing money into different asset class and mutual funds. It is said, "Do not put all your eggs in one basket". It means, an investor should not invest all his monies into one investment alternative rather he should invest into different alternatives such as; Stocks, fixed income securities, mutual funds, real estate, precious metals etc. He should diversify his portfolio by investing stocks of different sectors, if one sector or company is not doing well, other are doing well then portfolio will be balanced.

One should keep tracking his portfolio and should churn the portfolio, he should keep booking the profit and invest into other stocks.