Finally, after deciding who will manage your investment, whether you will try to time the market, and the various asset classes you wish to hold, you must decide which specific securities to buy within each class. This is termed security selection.
For example, you might decide that you want 30 percent of your money in small stocks. This is an asset allocation decision. Next, however, you must decide which small stocks to buy. Here again there is an active strategy and a passive strategy. With an active strategy, we try to identify those small stocks that we think will do the best in the future; in other words, we try to pick “winners.” Investigating particular securities within a broad class in an attempt to identify superior performers is often called security analysis.
With a passive security selection strategy, we might just acquire a diverse group of small stocks, perhaps by buying a mutual fund that holds shares in hundreds of small companies.
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SECURITY SELECTION
Sunday, November 22nd, 2009TAXES
Monday, November 9th, 2009Different types of investments are taxed very differently. When we talk about the return on an investment, what is really relevant is the after-tax return. As a result, taxes are a vital consideration. Higher tax bracket investors will naturally seek investment strategies with favorable tax treatments while lower tax bracket (or tax-exempt) investors will focus more on pretax returns.
In addition, the way in which an investment is held can affect its tax status. For example, individuals are generally allowed to open Individual Retirement Accounts (IRAs). The returns on an IRA are not taxed until they are withdrawn, so an IRA can grow for decades with no tax payments required. Thus any investments held in an IRA become tax-deferred.