What is meant by “selecting and screening investments”?

Selecting and screening specific investments is an important step in the portfolio management process.

However, this step should not be confused with asset allocation, which comes before it. Asset allocation involves deciding which types or categories of investment vehicles are right for you, based on such factors as your goals and tolerance for risk.

It also involves deciding how to divide up your assets among these different categories. You might conclude that a portfolio made up of 10 percent Treasury securities, 30 percent growth funds, 30 percent blue-chips, and 30 percent aggressive stocks would match your situation perfectly.

But an asset allocation scheme like this does not tell you which individual securities to buy within each of these broad groups.

For example, since there are literally thousands of growth funds to choose from, you may feel overwhelmed and have no idea how to narrow the pool. You need to establish some sort of a screening process that allows you to weed out and select particular investments.

Criteria for screening and selecting

Your screening system should be based on certain criteria or minimum standards that you expect your investments within each category to meet. If you are trying to select bonds, you can examine the creditworthiness of various debt issuers.

Keep in mind, however, that past performance results often are not a guarantee of future performance. Or, you can employ a more sophisticated system that adjusts total return based on risk factors and other measures of performance.

These might include annual figures on sales, earnings, and revenue for companies in which you are thinking of buying stock.

Other considerations may come into play as well. For instance, if you are trying to decide which blue-chip stocks to buy, you may be influenced by rumors that a particular company is about to come out with a breakthrough product that will enhance the value of its stock.

In any case, since the characteristics of a given investment may vary widely from another investment within the same category, a good rule of thumb is to follow as closely as possible the same criteria you used to create your overall asset allocation plan.

If you decided to invest 50 percent of your assets in aggressive stocks because you are a young risk-taker who really likes to live on the edge, you may be inclined to choose the most aggressive stocks within a particular grouping.

How do you go about screening and selecting?

Because most investors lack the time and expertise needed to screen and select their own investments, they normally rely on a qualified broker or financial planner.

However, if you are a sophisticated investor and/or willing to do some homework, you may be able to develop a system that meets your needs.

There are a variety of resources that you can consult if you choose to do your own investment research, including information available through investment research services.


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