一月 13th, 2008 | |
Posted in Finance
There are four general steps in portfolio management (investment) process:
- Write a Investment Policy Statement
- Develop an investment strategy
- Implement the plan by constructing the portfolio and allocating the assets
- Monitor, update, and rebalance the portfolio
An Investment Policy Statement provides investment discipline by requiring investors to articulate their needs, goals, and risk tolerance, ensuring that goals are realistic, and providing an objective measure of portfolio performance.
Investment objectives should be expressed in terms of both risk and return so that meeting the return objective does not expose the investor to more risk than he is prepared to tolerate.
Risk tolerance depends on an investor’s psychological profile and other personal factors, including family situation, wealth, income, age, and insurance coverage.
Common return objectives are:
- Capital Preservation – minimizing the risk of loss in real term.
- Capital Appreciation – managing real growth in the portfolio to meet some future need.
- Income – meeting specified spending needs.
- Total Return – growing a portfolio through capital appreciation and reinvested income.
Investment constraints include:
- Liquidity – for cash spending needs (anticipated and unexpected)
- Time Horizon – when funds will be needed
- Tax – the tax treatments of various accounts, and the investor’s marginal tax bracket
- Legal – restrictions on investments in retirement, personal, and trust accounts
- Unique Needs – constraints because of investor preferences or other factors not already considered
Target allocations to different asset classes can explain approximately 90% of the differences in portfolio returns over time.
Differences in average asset allocations across countries exist due to differences in 1) social factor, 2) demographic, 3) legal constraint, 4) tax laws, and 5) historical inflation rates.
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Tags:
Portfolio Management