steps in investment process

5 Steps in Investment Process


The process of investment involves the making of a suitable portfolio through efficient asset allocation. A portfolio is a basket of securities that we invest in to minimize our risk, and the process of choosing the most suitable assets for our portfolio is known as asset allocation.

Investment Process Steps

In this article, we will be providing steps of the investment process as to how we can make a filter and choose the most suitable investments for our portfolio.

Step 1. Understand your Investment Priorities

The first thing we need to do before we start building a portfolio is to assess the following –

  • Our financial goals;
  • Our capital outlay; and
  • Our risk appetite.

Our financial goals give our portfolio a direction, and our risk appetite and capital outlay play a primary role in deciding the kind of assets we can purchase for our portfolio.

Performing this step will give us a benchmark to be able to evaluate our portfolio’s performance, which we will discuss in the last step.

Step 2. Asset Allocation

After figuring out your financial priorities, the next step is to decide upon your asset allocation.

Asset allocation is necessary because it will give your portfolio a direction towards balancing your risk and rewards.

There are numerous strategies through which we can allocate assets. Some of the popular strategies include –

  • Asset Allocation by Age

This is a basic rule-of-thumb, with which we subtract our age from 100. The number we get is the percentage of our portfolio that should be invested in equity or stocks.

  • Strategic Asset Allocation

This strategy involves assigning proportions to different assets in our portfolio. These proportions depend on the expected returns from the assets.

  • Dynamic Asset Allocation

Here, we have to make changes in our allocations as per the ups and downs in the market.

There are many more strategies that have been developed over the years. It is necessary to do your financial planning and wealth management properly to make maximum profits. You can even build your plan or consult a financial planner to assist you in this crucial process.

Step 3: Building a Suitable Portfolio

Now that we have a strategy in hand, the next step is to start building a portfolio.

The secret to a good portfolio lies in diversification. This refers to the process of choosing different types of assets for your portfolio in such a way that you can balance your risks and rewards.

Depending on this, you can build the following types of portfolios – 

  1. Aggressive portfolio– includes assets that give high risks and rewards.
  2. Defensive portfolio – includes assets that are least sensitive to market movements.
  3. Income portfolio– includes assets that provide regular dividends or profit distributions to their owners.
  4. Hybrid portfolio– includes multiple types of assets like commodities, bonds, and real estate.

Once again, you can choose to consult a financial planner to assist you with this decision.

Step 4: Choosing the Right Assets

Now that you have laid the foundation of what your investments will look like, it’s time to choose the best assets to make your strategies work efficiently. For this, you will first have to explore your options and then carry out extensive research to choose the best ones.

When it comes to exploring your asset options, you can choose from a variety of assets. Many types of asset classes cater to varying levels of risk.

A few examples include – 

  1. Assets for low-risk appetite – Fixed-income and government securities.
  2. Assets for high-risk appetite – stocks and derivatives.

After exploring our options, the next step is to filter out the best investments through research.

From company reports to technical charts, there are multiple resources that we can use to filter out suitable investment processes.

The best way to research is to explore the two methods of investment process research and gain expertise in the one we are most comfortable with. These are fundamental and technical analyses. The fundamental analysis measures the underlying value of an asset by studying the prospects of the company, its industry, and the economy.

On the other hand, technical analysis is concerned with using charts and indicators to predict how the price of a security will change in the future. You can use either one of these methods, or a combination of both, to carry out useful research.

Step 5: Evaluating your Portfolio’s Performance

Finally, now that you have built a portfolio with the most suitable products, it’s time to test how your portfolio is performing. At regular intervals, you need to measure and compare the value of your portfolio to ensure that it is bringing you closer to achieving your goals.

Another critical point to note here is the importance of rebalancing your portfolio. If at any point, you feel that a particular asset will create excess losses in the future, you should immediately adjust or remove it from your portfolio.

Once we complete these five steps, we will have to continually monitor our portfolio to make sure that it is bringing us closer to our goals at all times. By building our portfolio strategically and re-balancing it whenever it is needed, we can ensure that the assets we have chosen will assist us in growing our wealth and achieving our objectives.


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