Achieving Your Investment Goals
What Is Involved in the Process of Portfolio Management?
In the hands of a successful money manager, your portfolio never "sleeps." First, the two of you devise a long-term investment strategy. And then, the real work begins.
Any book on investing will tell you that the process of portfolio management consists of a number of highly integrated steps, whose sole purpose is to first create an effective portfolio, and then to maintain it in the long-run according to clients’ investment objectives, investment horizons and risk tolerance levels.
Policy Statement
Think of the policy statement as a treasure map. It is supposed to spell out clearly which routes to take, how and when to take them, and what should be there at the end of the line. When people are asked what they expect to achieve from their investments, answers usually converge around statements similar to these:
- To retire ten years early.
- To make as much money as possible.
- To be debt free.
- To secure children’s future.
While these are all valid goals, they do not a policy statement make. Why? Simply, when goals are expressed in such a manner, they are far too open to interpretation, and certainly not binding to either an investor or portfolio manager.
Instead, the policy statement should be a journey of discovery, during which the investor should gain a clear understanding of his or her own objectives, life goals, as well as of any and all investment limitations. But writing the policy statement is not only a journey of self-discovery. Quite the contrary, it is also a journey of learning about financial markets, about basics of economic theory, and more importantly, about risks involved in investing.
Devising an Investment Strategy
A potentially successful policy statement should seek answers to the following questions:
- Does the policy statement clearly state an investor’s objectives, risk tolerance, and investment horizon?
- Is it written in such a manner that a new portfolio manager could easily carry out its mandates?
- What are the chances for an investor to stick to this policy successfully in the longer term?
- Since there is the portfolio manager on the other “side” of the policy statement, what are the chances that he or she would also stick to the policy’s mandates, regardless of how the portfolio and the overall market performe over time?
- Lastly, if and when implemented, what are the chances the policy statement would have helped the investor achieve his or her investment goals?
Constructing a Portfolio
A good policy statement clearly defines and governs an investor’s general investment strategy. Although the policy statement is not likely to contain a “shopping list” of investments that are to be contained in a portfolio, it should contain guidelines as to which asset classes the money should be invested in, as well as in what proportions.
For example, an investor planning to buy a house in the short term might prefer a portion of his portfolio kept in liquid assets that can be quickly switched to cash. Or, a newly retired investor whose income has been significantly reduced might seek her portfolio to generate additional income and thus contain predominantly income-generating securities. On the other hand, an investor who has covered most of his “bases” (house, cars, children’s education, etc.) during the accumulation phase might insist on seeing his nest egg grow at a faster rate, thus seeking more aggressive growth investments.
As you can see, a number of factors come into play when constructing a portfolio, ranging from understanding an investor’s investment objectives, time horizon, and constraints, to knowing the overall market conditions and economic outlook.
Monitoring and Constant Evaluation
Finally, one of the obligations of your portfolio manager demands that your portfolio be continually monitored and updated according to the investment needs stated in the policy statement, and adjusted based on its regular reviews. It is of paramount importance for you and your portfolio manager to sit back together every now and then and review the policy statement. Often, a bit of tweaking can do a world of good.
An important part of portfolio maintenance is performance evaluation. The policy statement should contain clearly stated performance targets, which need to be revised if and when investors' personal circumstances, as well as the overall condition and outlook for the markets, change. It is imperative to revisit the policy statement as often as practicable to ensure its validity and applicability.
Many investors think that writing a policy statement, (oh yes, it should be put down on paper and signed both by you and your portfolio manager) is merely a formality. However, as you have hopefully learned from this article, it is not even remotely so. The policy statement is a document that asserts discipline, both on you and your portfolio manager. It also protects your investments and it ensures your ultimate goals are reached. And, it is certainly not just a piece of paper, but rather a strong and evolving promise of your future.
