Investment Portfolio Management

Prudent investment portfolio management, the planning and
implementation component of your investment strategy, is your
roadmap to successful investing.

As you surely know, savings accumulation is just the first step in the process of building a financially sound future. Unless you effectively manage the money you’ve acquired, you very well may end up with nothing to show for your efforts.

What is an investment portfolio? In a nutshell, it is the entire basket of investments you own. It may include stocks, mutual funds, bonds, real estate, collectibles, coins, etc. Your total portfolio can be broken down into sub-portfolios, such as your 401(k), a stock trading portfolio, and perhaps an income portfolio. Each sub-set is also a basket or collection of investments.

What is Portfolio Management? Quite simply, it is the decision-making practice you employ with regard to your invested assets. This is both an art and a science. It encompasses asset selection and allocation, monitoring, and plan implementation. Done right, good investment portfolio management will match your investments to your objectives and balance risk against reward.


WHAT ARE YOUR INVESTMENT OBJECTIVES?

There are a number of different objectives for investing, so it differs for each individual. I guess you could say that these objectives are subjective! But seriously, before embarking on any investment venture, you must know where you’re headed so that you can devise an appropriate plan to get there.

Are you saving for retirement? College for the kids? A downpayment on a house? Starting a business? Planning to replace all your furniture? Generating income?

Assess your needs for both the short-term and the long-term. Time horizons matter! Short-term objectives require a low risk strategy, while long-term objectives can handle higher risk and provide greater profit potential. A good rule-of-thumb is to stick with low-yield, safe investment vehicles for money you will need within five years. If you don’t need it that soon, go for higher risk/higher return.


WHAT IS YOUR RISK TOLERANCE?

Much of your tolerance for risk should be determined by your timeline. If you’re young and plan to invest for decades, higher risk investments are easier to tolerate in the long-term picture. (Of course, this would be only a portion of the overall portfolio.) On the other hand, if retirement is just a few short years away, you don’t want to jeopardize your hard-earned savings in more risky investments. It could evaporate very quickly in a market downturn, and you likely would not have time on your side to recover those losses.

The good news is there are ways to decrease your risk through well-planned portfolio management, as you will see as we go along.

THE COMPONENTS OF
GOOD PORTFOLIO MANAGEMENT

The gameplan for your investment portfolio should be for the long-haul. The portfolio management strategies you employ should address growing your asset base, protecting your principal and your profits, obtaining the highest return with the least risk, and guaranteeing that your investment portfolio will be worth more in the future.


HOW DO WE ACCOMPLISH THESE GOALS?

1. Establish your Portfolio Allocation Ratio. There are a few to choose from, each has its own merits. Here is a selection, but you may find more choices if you do some research. Choose one that suits you best.

2. Establish a routine. Set aside one hour a week to review your portfolio, less often for a set-it-and-forget-it portfolio. If you’re monitoring a portfolio of growth stocks yourself, set aside 5-10 minutes/day to check closing prices and record trailing stops.

3. Save regularly to invest. Of course, this should be a part of your budgeted plan, and done after your budget and debt elimination are well-in-hand. The best way to systematically save to invest is to set up automatic monthly transfers from your primary account into a savings vehicle or brokerage account. It’s easy to set up, and ensures that you steadily make progress on this goal.

4. Asset allocate. Uncertainty is an inevitable part of successful investing. Different types of investments behave differently in different types of economic conditions. Therefore, it stands to reason that you should own a broad mix of investments across different asset classes to minimize risk, dampen volatility in your overall portfolio, and catch the gains wherever a bull market may be.

5. Diversify. This includes owning investments across different asset classes, as stated above, as well as owning a variety of securities within those asset classes. That way you increase your chances for a better return because you’re not relying on any single investment, which have a habit of turning against you.

6. Delegate. If you love to research stocks, and understand cash flow, P/E ratios, and earnings spreads, go for it! On the other hand, if you don’t have the time or inclination to sift through mounds of data and company profiles, then delegate that responsibility to trusted research and advisory firms. Then use that information to whittle down your choices by comparing stocks or funds to suit your portfolio and appetite for risk.

7. Monitor Your Positions. There are a few factors to consider and a number of strategies to accomplish this. First of all, there’s position sizing to ensure that no one investment will ruin your whole portfolio. Second, you need an exit strategy for securities that are falling, before you lose too much. This may be done with trailing stops (recommended for stock positions), or monitoring uptrends and downtrends, such as the 200 day moving average (recommended for mutual funds and other investment baskets). More on these later.

8. Balance Your Portfolio. Typically, this should be done once a year. It keeps your portfolio within the Portfolio Allocation Ratio you’ve chosen, drawing on the strengths of your winners and preparing your portfolio for a change in market conditions.  (See page on Portfolio Rebalancing.)

9. Put a Lid on Taxes and Expenses. This is a surefire way to increase your investment returns and grow your portfolio. Expenses often come in the form of front-end or back-end loads, 12b-1 fees, and redemption penalties. These can be avoided by sticking with no-load funds with no 12b-1 fees. For ETFs and CEFs, expenses can vary widely, so it pays to shop around and compare. It also helps to use a discount broker to keep transaction costs down, as these can add up quickly, especially if you trade often.

10. Implement Your Plan. Now that you know what to do, DO IT! Decide what Allocation Ratio suits you best, then set out to find solid investments that fit those parameters. Watch your trailing stops and moving averages, rebalance annually, reinvest dividends, dump any duds, and wait for the right opportunity to buy. Start small and build as you gain confidence. Remember, the markets will go up, and the markets will come down. Plan accordingly, and be patient.

As far as monitoring trailing stops, moving averages, and position sizes, there are software programs available or you can devise your own monitoring system. I use a binder with a spreadsheet I designed.

If you prefer a hands-off approach, commit to checking on your investment portfolio monthly or quarterly, and rebalance once a year.


These are the nuts-and-bolts of investment portfolio management.
Refer to this list periodically to make sure you stay on track.


Congratulations on being one step closer to
faithful steward investing!

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