Investment Philosophy and Strategy is a term given to the process of deciding what to invest in, how much to invest and for how long. The investment strategy is an important decision as it will have a major impact on the profit or loss generated by the investment.
Benefits of Investment Philosophy and Strategy
1. It can help investors to make the best investment decision.
This is because using an investment philosophy and strategy is the first step in the investment process before doing any analysis. The investor will know what to look for in a company and can then do detailed research on each company after deciding to invest.
2. It helps avoid mistakes by providing guidelines on how to analyze a particular situation.
This is mainly because it provides guidelines which every investor must follow when analyzing a situation. For example, all investors should be familiar with fundamental analysis, technical analysis and valuation methods (discounted cash flow and relative valuation). These are important things that every investor should have a clear grasp of before making an investment decision.
3. It helps in the process of valuing shares.
This is because an investment philosophy and strategy provides investors with a clear guide to follow in valuing a stock to determine if it is undervalued or overvalued. The valuation of shares is important as it determines the profit potential that a particular share will have when it is eventually sold.
4. It helps to make financial decisions easier.
An investment philosophy and strategy can help make financial decisions easier by providing guidelines on how much investment in which company should be made at what stage of the business cycle and when to buy or sell a particular stock.
5. It reduces the risk of over diversification.
An investment philosophy and strategy is important because it helps in deciding what not to invest in so that the investor can limit the risk to a particular sector. This is important because it helps reduce the risk of over-diversification and allows an investor focus on a particular sector in which he or she has knowledge or experience in. A financial portfolio that is well diversified risks too much cash as companies move up or down due to cyclical, seasonal or political reasons.
