Portfolio Management

Portfolio Management

Introduction:

Portfolio management is a conglomeration of securities as whole, rather than unrelated individual holdings. Portfolio management stresses the selection of securities for inclusion in the portfolio based on that security’s contribution to the portfolio as a whole. This purposes that there some synergy or some interaction among the securities results in the total portfolio effect being something more than the sum of its parts. When the securities are combined in a portfolio, the return on the portfolio will be an average of the returns of the securities in the portfolio. For example, if a portfolio was comprised on equal positions in two securities, whose returns are 15% and 20%, the return on the portfolio, will the average of the returns of the two securities in the portfolio, or 17.5%. From this we will discuss the process of creating a diversified portfolio. The diversified portfolio is a theory of investing that reduces the risk of losing all your money when “all your eggs” are not in one basket. Diversification limits your risk an over the long run, can improve your total returns. This is achieved by putting assets in several categories of investments.

Portfolio Process:

The portfolio process is as follows:

1. Designing an investment objective;

2. Developing and implementing an asset mix;

3. Monitoring the economy and the markets;

4. Adjusting the portfolio and measuring the performance

Due to the intensity of each of the four items, we will be covering only the first two.

1. Investment Objective:

This topic is broad and contains three major divisions. They are foundation objectives, constraints and major objectives.

Foundation Objectives: These objectives generally receive the most attention from investors and are determined by thorough determination of your needs, preferences and resources.

 Return – you need to determine whether you prefer a strategy of return maximization, where assets are invested to make the greatest return possible while staying within the risk tolerance level, or whether a required minimum return with certainty is preferable, generating only as much return with emphasis on risk reduction.

 Risk – There are many ways to assess the risk tolerance of any particular investor, from the least knowledgeable of investments to the very sophisticated investor. Beside...

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...the market as a whole. Diversifying among a number of securities can reduce nonsystematic risk.

Both of these types of risk can be avoided when you correctly evaluate your risk guidelines and determine the maximum amount of risk that you are willing to handle.

Conclusion:

Once your portfolio has been established then next step in the management is to evaluate your portfolio’s performance. The success of your portfolio is determined by comparing the total rate of return of the portfolio to the average total return of comparable portfolios. It is essential to develop a system to monitor the appropriateness of the securities that comprise the portfolio and the strategies governing it. The process is twofold as it involves monitoring:

 The changes in your goals, financial position and preferences;

 Expectations in capital markets and individual companies;

Remember that diversification is more than placing your eggs in different baskets. It is also making sure that all your baskets aren’t made from the same material.

References:

Wall Street 101, www.familyinternet.com

Learning to Invest, www.learningtoinvest.com

Your Money Coach, www.yourmoneycoach.com