Diversified investment advisor
Why should one diversify investments
An old adage that advised people not to put all the eggs in one basket holds good even today. Todays investors must pay heed to this wisdom, and not confine themselves to one asset or one class of asset. Otherwise, they could lose their investments like a basket of egg falling accidentally.
Type of assets available for diversification Investors can choose to invest in
a. Stocks
b. Bullion
c. Commodities
d. Foreign Exchange
e. Real estate, etc.
Each of these assets is again full of options.
For example, investor could choose to invest in Microsoft or other technology stock. Or he could choose to invest in stocks of different banks, or stocks of textiles.
Instead of focusing on any one type of asset or any one type of industry, if investor spreads his funds judiciously, he can generate reasonable returns.
Are the returns going to be equal to the returns that can be generated from a single asset, like real estate Certainly no. Sometimes the returns from one asset may far exceed any other option available in the market. However, any slump too may be unequalled at any given point of time like the slide of technology stocks after September 11.
Alternately, if the investor chose to divide his funds into 100 equal parts and invest them into hundred different assets, he could still be badly off. It is necessary to study the available investment options before investing in them. The ideal solution to this problem, therefore, is to diversify investments in such a manner that they minimize the risks and maximize the returns.
Need for advice on diversified investments Investor could be taken by euphoria prevailing in the market, and buy an asset at a high price, only to find it slump. And not knowing the prospects of the industry, the investor may opt to book losses at that point, thereby losing substantial amount of his investment.
Therefore, it can be concluded that riding undulations of asset value movements requires certain level of skills, which an average investor may not have. This is where a diversified investment advisor steps in. Who is a diversified investment advisor
A diversified investment advisor is generally finance or economics professional. He or she analyses the market trends by considering conditions like:
a. Past trends
b. Demand and supply of a product, within the nation and abroad
c. Price trends
d. Purchasing capacity of the people at a particular point of time and its implications on demand and supply curve of the product
e. Government policies conductive to a particular industry
f. Impact of any new technologies on the market
g. Political scenario
h. International relations
i. Trade deficit
j. Type of product- whether it is essential item like oil or gas, or a luxury item like some white goods that people may opt to forego in case of credit squeeze etc.
In addition, he or she assesses investors capacity to absorb risks. Different investors have different levels of such risk absorption. An investor, whose income is barely sufficient for meeting his every day necessities like food, clothing, and shelter, is hardly in a position to invest any savings into a risky proposition that will wipe out the savings. However, a rich person, who has substantial funds at his disposal, may be willing to take higher levels of risks for higher returns.
After correlating the implications of market conditions and investors risk-taking capacity, and understanding the level of return needed on investment to defeat inflation, the diversified investment advisor presents his or her investment recommendations, for a fee.
An investment suggestion given at one time may not hold good at another time. Therefore, investment decisions are not one-time jobs. They have to be reviewed periodically as the market conditions are never static.
In addition to such investment recommendations, diversified investment advisor also provides some services like
a. Assets management
b. Retirement planning,
c. Financial services,
d. Estate planning
e. Portfolio management etc.
Estate planning, retirement planning and such functions involve tax considerations as well. In addition, most of these services relate to long-term investments of investors.
Financial services include functions like identification of appropriate mortgage for the investor, facilitating such mortgages and credits, consolidation of debts, refinance of debts, etc.
Diversified investment companies
Diversified investment companies are commonly known as mutual fund companies or unit investment companies. They pool funds of a large group of investors and invest them in different assets, to reduce risk and maximize returns for these pool members.
Major advantage of investing in diversified investment companies is that even small amounts can be invested. An investor who has savings of $500 may not be able to buy some real estate. But, if he invests in a mutual fund that specializes in real estate, he would be able to get returns at the rates that are applicable to real estate.
Returns on investments are measured in rates rather than in dollars or any other currency.
If an investor invests small amounts regularly with diversified investment companies, by the time he retires, he would have accumulated a substantially large retirement kitty. This is because the returns on his investments would have compounded at much higher rate than inflation.
It is because of this advantage that many people look at the diversified investment companies for their retirement planning.
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