Week 3: Devising investment strategies – principles and practice

Introduction

Welcome to Week 3 of Managing my investments – a week that explores the theories behind good investment management practices. Begin by watching the video to hear Martin Upton introduce this topic.

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Transcript

MARTIN UPTON

Hello again everyone, I’m Martin Upton and I work at The Open University’s True Potential Centre.

In Week 3 of Managing My Investments you will start to examine strategies for compiling an investment portfolio. To do this involves some of the more complex concepts that you will come across in this course – but don’t worry, you’ll be guided through these carefully.

We start by reminding ourselves of the basic rules for investment management we learnt in Week 1 particularly the notions of linking your personal objectives in life and the time horizon which relates to them, to the structure of your investments.

We then examine the different types of risk that may apply to your investments – understanding these will help ensure that your portfolio mix aligns with your appetite for risk. We move on to look at two key concepts which need to underpin the management of your investments – portfolio theory and the capital asset pricing model (or CAPM as it is commonly abbreviated).

Understanding these two concepts will help to ensure that your investment portfolio has the right mix of risk versus expected return. To demostrate that this is not just academic, we look at how fund managers apply portfolio theory and CAPM in practice.

We then examine a number of key ideas about how markets operate and the opportunities these may provide for making timely investment decisions in effect, assessing our capabilities to predict market movements.

Some market analysts who adhere to what is called ‘Efficient Market Hypothesis’ maintain that this is not normally possible – whilst others, called chartists or technical analysts, maintain that there is some scope to do so. And we’ll also take the opportunity here to provide some useful tips about investment management – like ‘pound cost averaging’.

It’s a very full week and the most demanding one so far – but do persevere and you’ll be prepared to take on the rest of the course with great confidence. Enjoy Week 3!

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We start by building on the work on investment management planning that we started in the later stages of Week 1. Armed with the knowledge gained in Week 2 about the range of personal investments available, we are now in a position to build and refine our approach to investment management.

To help us understand the key principles of investment management, we explore key underlying concepts like portfolio theory, the efficient markets hypothesis and the capital assets pricing model. We look at how these theories are applied in the real world of investment management and what they tell us about how we should manage our investments and the decisions we should make.

We also discuss tactics that we can use to manage our portfolios – like pound cost averaging.

There’s plenty to get through – but once we’ve completed the week you will have a robust understanding of the key theories about investment management and how to apply them in practice.