DETAIL:
There are two interlocking parts to the project (call them A and B). Part A asks you to develop
an investment plan for yourself and to describe that plan in a Statement of Objectives. Among
other concerns, you will want to give detailed and specific consideration to three elements: (1)
how much money you’ll need to realize your financial goals, (2) the investment capital (both
present and future) that you can dedicate to your plan, and (3) the rate of return you can expect
to earn on that capital.
Part B invites you to put your plan into action, constructing and monitoring a portfolio that is
consistent with your objectives. You’ll begin, of course, with a look at where you are now: how
much money do you currently have invested, and in what investment vehicles. And then you can
start to wrestle with the question of getting from your current position to the portfolio you
really want to hold.
Part A: The Investment Plan
Many individual investors are in trouble from the day they buy their first share of stock—because
they lack an investment plan. Without a plan, investors must make “off-the-top-of-their-heads”
decisions about portfolio risk, asset allocation, and security selection; indeed, many such
investors are unaware even that these decisions need to be made! Moreover, without a plan,
investors have no reliable means of evaluating investment performance and modifying portfolio
holdings. (Want to test my assertion? Ask any investors you know (a) what their portfolio
allocation is, (b) what return they earned over the past 12 months on each asset class and on
their total portfolio, and (c) how that performance compared against an appropriately-matched
benchmark.) Part A of the investment project will ensure that you don’t make the same
mistake. Instead, you will follow a systematic approach for constructing a portfolio: assessing
your own risk tolerance, adjusting for liquidity, income needs, and tax exposure, identifying your
financial objectives and holding period(s), and determining appropriate asset allocations. Your
portfolio decisions will also reflect your understanding of (and agreement with) the implications
of Modern Portfolio Theory and the Efficient Markets Hypothesis. The product of your work will
be a 6-8 page analysis of your own investment situation and the creation of a formal and
structured Statement of Investment Objectives. And please don’t spend much time writing an
essay on risk aversion or the benefits of diversification; I already know that stuff. What I’m
interested in is how those concepts affect your investment design.
(Here’s another way to think about what Part A should contain: In Week 3 we’ll discuss “Your
Personal Investment Profile and Statement of Investment Objectives”.
Part A should include everything that’s presented in that discussion, including the interlocking
elements of:
(1) capital to invest (both current and anticipated)
(2) return estimations (a function of risk and your asset allocation)
(3) financial goals (specified as to both timing and dollar needs).
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