Extending Chapter 8: The Fundamentals of Investing

What You'll Do and Learn

• You'll extend your knowledge of how investing in a variety of different investments can help reduce risk.
• You'll learn about Standard & Poor's Investment Policy Committee and how its views are reflected in investment recommendations by Standard & Poor's analysts.

Introduction

In this activity you will learn about monitoring your investments and using asset allocation to help reduce risk and position your portfolio for future growth.

Chapter Notes

Chapter 8 explained that different types of investments carry different levels of risk. Investments that carry very little risk also offer low rates of return. More risky investments usually offer higher potential returns over time. Among the different types of risk to consider in selecting investments are inflation risk, interest rate risk, business failure risk, financial market risk, and global investment risk.

In Chapter 8 you also learned about the concept of diversification, or spreading your assets among different types of investments to help reduce risk. Asset allocation is the process of determining how to divide your assets among stock, bond, and money market investments based on your investment goals and time frame for reaching those goals. In general, the longer your time frame, the more you will need to invest in growth investments such as stocks to help offset the effects of inflation. At the same time, your longer time frame can help you weather the relatively greater risk of price fluctuations that stock investments carry.

A financial planner can help you target an appropriate asset allocation based on your investment goals. However, you'll still need to monitor your investments on a regular basis to ensure that you are on track toward reaching your goals. You may also want to make small adjustments to your asset allocation from time to time based on current market factors affecting stock and bond investments, such as the overall health of the economy, corporate earnings, and the general level of interest rates.

Site Notes

The Standard & Poor's Investment Policy Committee is composed of senior S&P staff with many years of experience in analyzing market and economic activity. Their weekly reports are published on the S&P Web site and are cited in many financial news publications.

Let Me Try

Go to the Standard & Poor's Investment Policy Committee Web page and then print the Worksheet activity.

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