Lorraine J. Green, Contributor
Lorraine Green
MANY OF us hear the term portfolio management and believe it to be outside our scope of access. We often view it as an opportunity afforded to the wealthy investor. However, if you are at all committed to the notion of sustainable wealth then serious consideration should be given to using the expertise of a licensed professional portfolio manager.
For clarity, portfolio management is the science of making decisions about matching investments to objectives, while
balancing risk. Risk is the possibility that an investment's actual return will be different than expected. It should also be
mentioned that portfolio management is directly impacted by
constraints such as time and your liquidity requirements.
THE FUNDAMENTALS
There are three basic steps in the portfolio management process:
Planning.
Execution.
Feedback.
PLANNING
Planning involves defining your objectives and constraints. In this context, objectives refer to specific financial returns that are to be achieved over the life of the portfolio. These returns are always contrasted against the risks that will be undertaken.
Constraints generally fall into one, some or all of the following:
Time Horizon: this refers to a fixed point in time when a certain event or process is thought to end. That is, some time tomorrow, your manager will evaluate the portfolio to ensure that your desired returns are being achieved.
Taxes: Your portfolio manager will choose those products that will minimise your tax liability.
Liquidity: In this context,
liquidity refers to those needs for cash that may arise throughout the life of the portfolio. It could be for an unexpected illness or a natural disaster.
Legal/Regulatory: Specific to the market in which your investment products are domiciled, there are regulatory requirements that you will need to
satisfy. Your portfolio manager's expertise will guide you in
ensuring that there is compliance.
Unique circumstances: The amount of income that is available to your family will impact the structure of your
portfolio. Other impacting
circumstances are your dependents and your age.
Based on the above, your
portfolio manager will prepare a document that will guide all decisions made in your portfolio. This document is usually referred to as an investment
policy statement (IPS), but will differ across brokerages.
EXECUTION
This is simply implementing all the plans laid out in the IPS. Once the products have been identified, they are purchased in order to initiate the portfolio. Your portfolio manager will carefully monitor this step so that transaction costs are kept at a minimum.
FEEDBACK
This final step refers to the review of the portfolio in light of any changes, be it objectives, constraints, or market conditions. Feedback is crucial to:
Evaluating actual returns of the portfolio.
Determining factors that
contributed to portfolio performance.
Determining success or failure of the portfolio manager.
Deciding whether the portfolio's assets meet your wealth objectives.
Portfolio management alleviates the hassle of you having to do it yourself. Your investment decisions will be better informed as you are guided by the expertise of the portfolio manager.
Having a professionally-designed portfolio in light of all objectives and limitations is an ideal way to creating, growing and protecting your wealth.
Lorraine Green is wealth manager at NCB Capital Markets. Contact her at 1-888-4WEALTH or info@ncbcapitalmarkets.com. NCB Capital Markets Limited ('NCBCML') through its representative(s) has provided information to you on various financial
products and services and investment opportunities for information and educational purposes only. While NCBCML has made every effort to ensure that the information provided to you is accurate and based on research and analysis that we have carried out or derived from sources that we believe to be accurate and reliable, NCBCML makes no representations or warranties about the accuracy, completeness or suitability for any purpose of the information published and will not be liable for any loss which you or anyone else may suffer in reliance on the information we have provided to you.
