Asset Management As A Tool In Beating The Odds

Asset Management seems like some arcane science practiced by brilliant experts at first glance. Although the expertise of most money managers may be outstanding, the techniques of asset management are available to any investor. The whole idea behind asset management is to create some kind of stability in an investment portfolio that can protect the investor, to a certain degree, from market volatility. Market volatility is only a problem because, try as we may, we humans cannot predict the future. Any investment software or tracking method can only offer approximations of what the market might do in the future.

One of the key concepts of asset management is diversification. Diversification between types of investments, such as stocks and bonds, as well as diversification across a number of industries and countries can offer a buffer against volatility in any one investment, industry or country.

For the individual investor, this aspect of asset management can cause some confusion. The first question that comes to mind is; How much diversification is enough to offer protection against volatility? There is no easy answer to that question. The individual investor realizes that they don't have billions of dollars to work with like the mutual funds do. As a result, the investor has to limit their purchases.

The best approach is to educate yourself about the risks and rewards of each investment and sector. The next step is to select a basket of investments that are best suited to your risk tolerance as well as your investment goals. Also realize that as your portfolio grows, you can diversify more. Remember that the aim is to select good quality investments, but also to protect your capital as well.

Diversification within a sector can also offer protection against volatility. For example, in the consumer sector, investing in a supermarket chain that sells to basic consumer needs could be complimented by investment in a more diversified, higher end supermarket chain that situates itself in upscale neighborhoods. In this case, one would expect the high-end company to have higher profits, but in an economic slowdown, the basic supermarket chain might see less of a contraction. If possible, viewing data about how one performed in comparison to the other during past economic contractions may give a hint of future possibilities.

The speculative view of investing, whereby an individual hopes to make a large amount of money quickly, tends to be at odds with the diversification model of investing and asset management. There are two reasons for this; the first is that speculative investing is high risk, where as the diversified approach tries to limit risk and secondly, the concept of asset management aims at protecting capital, thereby ensuring survival and long term profits. One of the predictable outcomes for many speculative investors is to run out of capital and be forced out of the market.

There are three components to a realistic goal in investing; the first is a accurate idea of what can be earned through a particular kind of investment; the second is to know what you want to earn through investing; and the third is to decide when you will abandon an investment that is falling in value. All three of these issues call for some study and thought. It's easy to make an unrealistic judgment in this area. Once again this is where careful asset management can help you. If you are diversified, a mistake on a single investment won't be as devastating as it would be where there is only one investment.

The whole idea behind asset management is to give the investor the best possible chance of survival, which in turn will offer the best odds of ultimately succeeding in achieving their investment goals. Nobody can predict what the markets will actually do, but if you have a system that will protect your capital and keep you in the game longer, your odds of winning will improve.

Michael Russell

Your Independent guide to Asset Management