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Portfolio Management Process - Coggle Diagram
Portfolio Management Process
Determine Investment Objectives & Constraints
Return Objective & Risk Objective
advisor balances how much cx wants to earn + how much they can risk
primary objectives
safety = capital preservation; no big losses
income = regular income (divs, interests)
growth = capital appreciation (price increase)
secondary objectives
liquidity = able to get cash quickly
tax minimization = reduce tax paid
Investment Constraints (can stop or limit investment plan)
time horizon = how long can cx invest for (short term is low risk)
liquidity requirements = how quickly can it sell to get cash; rich cx needs 5% cash reserve; cautious needs 10% cash
tax requirements = high tax bracket prefer capital gains (lowest tax; divs = only portion gets taxed; interest income from bonds gics = 100% taxable)
legal + regulatory = follow legal norms / no insider trading
unique circumstances = cx preferences, wont invest in particular types of stocks (tobacco, betting)
Design an Investment Policy Statement
IPS = investment policy statement = formal written agreement, agreed by both manager + client, defines how portfolio will be managed; rules and guidelines
includes objectives, constraints, asset allocation
protects manager + client legally, keeps investment plan consistent + disciplined, avoid emo decisions, basis for manager performance & compliance evaluation
Develop the Asset Mix
Asset Mix
% of portfolio in diff assets (how much % in cash / stocks / bonds)
asset classes = cash (t bills, GICs , money market); fixed income (bonds, strip bonds, mortgage backed secs); equities (stocks, mutual funds, etfs); other assets (real estate, gold -- best against inflation, hedge funds)
Setting the Asset Mix
depends on market conditions, cx goals, risk profile
asset class timing = switch between stocks, bonds
link between business cycle & asset mix
recovery / expansion = eco growing, infla growing - buy stocks
peak = infla max, rates max - sell stocks buy short term cash / bonds
recession = eco slow, layoffs -- sell short term buy long term bonds
trough = rates low, recovery begins -- sell bonds, buy stocks
Importance of Asset Allocation
diversification = reduces risk but too much limits returns
rebalancing = adjusting portfolio to meet target %
Strategic Asset Allocation
long term mix; set once rarely change; 60% stocks bonds 40%
Ongoing Asset Allocation
dynamic = adjusts back to og, rebalances yearly; remember as 'discipline' -- switches back to same routine, if stock % in portfolio rises to 50 or 65% to switches back to og settings, disadv=sometimes can sell winners and hold onto losers
tactical = temp shift to take advantage of market, more bonds if stocks expected to fall; remember as 'timing' based on timing and condition of markets, you adjust your portfolio, add or subtract stocks / bonds on market movements
Selecting the Securities
what specific investment product goes into the investment plan
follows IPS - provides guidelines on what & how to invest
Monitor the Client, Market, Economy
Monitor the Client
regular updates on cx financial goals, risk levels, situation = if the portfolio suits the cx or no
Monitor the Market
keep eye on the market movements = anticipate moves, make changes regularly; analysts give range dont predict
Monitor the Economy
track gov, inflation, gdp = eco changes affect asset mix
Evaluate Portfolio Performance
Measuring Portfolio Returns
comparing portfolio returns to similar portfolio / market as benchmark
S&P/TSX is usually a benchmark, also t bills used as benchmark - considered risk free
Calculating Risk Adjusted Rate of Return
Sharpe Ratio = each unit of return earned per unit of risk taken; SR=(total return on portfolio-risk free return)/standard deviation of portfolio; high sharpe = better performance;
total return ratio = (increase in value/total value)x100
Other Factors in Performance Measurement
consider factors like market conditions, cx goals, long term results
Rebalance the Portfolio
based on the performance = repeat step 4 to reselect the asset mix and select secs to be added or subtracted