Applying investing theory to practice

This chapter describes theories from economics that are widely used to determine the price it is deemed worth paying for an asset or portfolio of assets, taking account of risk, as well as theories based in psychology that explain why price may deviate from an asset’s intrinsic value. These theories underpin the common practitioner techniques of fundamental analysis, technical analysis, and active and passive portfolio management. Individuals and households should normally consider using investments, such as equities, to help them achieve long-term goals. The strategies for managing the risk and return involved are relatively straightforward where the aim is to accumulate assets, but are more challenging during decumulation stages of life, such as retirement. This is particularly so, because monetary and social policies, and also climate change, may increase the volatility of investments