1. Steps in the Portfolio Management Process
(1) Write a policy statement ( that will guide all future decisions)
(2) Develop an investment strategy (consist with policy statement)
(3) Implement the plan (allocate assets, and choose securities based on market conditions)
(4) Monitor and update (investor’s needs and market conditions, rebalance portfolio as needed)
Concepts or Definitions
Individual Investor life cycle (Investor here can be an individual or an institution)
(1) The Preliminaries: Insurance and Cash Reserve (includes investment can quickly convert to cash with little change of a loss in value, at least enough to cover 6-month living expenses.)
(2) Life cycle net worth and investment strategy
Accumulation phase: long-term: retirement, children’s college needs, short-term: house, car
Consolidation phase: long-term: retirement short –term: vacation, children, college needs
Spending phase: long-term: estate planning short-term: lifestyle needs, gifts
2. Investment Policy Statement
(1) Investor should be responsible to write this statement but advisor should help
(2) Indentifies client’s Investment Objectives and Constraints
(3) Clear Statement of Client Risk Tolerance (Total tolerance is a function of an individual’s psychological makeup; is affected by current insurance coverage, cash reserve, family situation, age, income, net worth so on)
(4) Impose investment disciplines on both clients and manager
(5) Identifies Risk (attached to different asset classes)
(6) Identifies a benchmark portfolio consistent with client preferences
3. Investment Objectives:
(1) Objective should be expressed in term of BOTH Risk and Return because of the trade-off between risk and expected return.
(2) Objectives may be stated in term of an absolute or a relative %.
(3) Objectives could be stated in term of a general goal.
4. Four General Goals of Investment Objectives:
(1) Capital preservation: Meaning income at a least equal to the inflation This is a strategy for strongly risk-averse investor or for funds needed in the short –run, such as for the next year’s tuition payment or a down payment on a house.
(2) Capital appreciation: Earning a return exceeds the rate of inflation (most risky objective)
(3) Current Income: earning a return to generate income, rather than through capital gain. It is to supplement earnings to meet living expenses or to increase spendable funds
(4) Total Return: Meeting a future need through Capital Gain and Current Income.…