Managing an investment portfolio is a dynamic process that involves setting objectives, asset allocation, portfolio construction, execution, monitoring, and adjustment over time. It aims to create optimal risk-adjusted returns for investors based on their goals and risk tolerance. Key stages include developing an investment policy statement, forming capital market expectations, determining strategic and tactical asset allocation, selecting securities, monitoring the portfolio, and rebalancing when necessary.
Investment Policy Statement Lays the Foundation
The investment policy statement sets forth the investor’s objectives, constraints, and preferences that will guide the investment process. It specifies things like time horizon, liquidity needs, tax considerations, legal and regulatory factors, unique circumstances, return objectives, and risk tolerances that constrain the overall investment strategy.
Asset Allocation Involves Setting Target Exposures
Strategic asset allocation involves deciding what proportion of the portfolio should be invested in different asset classes like stocks, bonds, cash, etc. Factors assessed include expected returns, volatilities, and correlations. The tactical asset allocation then makes periodic adjustments to take advantage of market opportunities.
Portfolio Construction and Security Selection
Based on the asset allocation targets and investment universe, appropriate securities are selected to build the portfolio. This stage implements the investment plan and involves screening, analyzing, evaluating, and selecting specific stocks, bonds, funds, etc. to include in the mix.
Execution and Ongoing Monitoring
After constructing the portfolio, the holdings need to be purchased. Then the portfolio is monitored on an ongoing basis. The manager evaluates if objectives are being met, if the economic outlook has changed, if assets need to be reallocated, or if securities should be sold or bought.
Rebalancing Back to Policy Targets
As markets move, the portfolio asset allocation drifts from its policy targets. Rebalancing trades assets to bring exposures back in line with the strategic asset allocation while minimizing costs like taxes and transaction fees.
In summary, managing investment portfolios dynamically involves multiple integrated stages including laying out the game plan, setting asset allocation targets, building the portfolio, executing trades, monitoring developments, and rebalancing to optimize risk and return over time.