Portfolio Management - The Portfolio Management Process

The portfolio management process is the process an investor takes to aid him in meeting his investment goals.

The procedure is as follows:

  1. Create a Policy Statement -A policy statement is the statement that contains the investor's goals and constraints as it relates to his investments.
  2. Develop an Investment Strategy - This entails creating a strategy that combines the investor's goals and objectives with current financial market and economic conditions.
  3. Implement the Plan Created -This entails putting the investment strategy to work, investing in a portfolio thatmeets the client's goals and constraint requirements.
  4. Monitor and Update the Plan -Both markets and investors' needs change as time changes. As such, it is important to monitor for these changes as they occur and to update the plan toadjust for the changes that have occurred.


Policy Statement
A policy statement is the statement that contains the investor's goals and constraints as it relates to his investments. This could be considered to be the most important of all the steps in the portfolio management process. The statement requires the investor to consider his true financial needs, both in the short run and the long run. It helps to guide the investment portfolio manager in meeting the investor's needs. When there is market uncertainty or the investor's needs change, the policy statement will help to guide the investor in making the necessary adjustments the portfolio in a disciplined manner.

Expressing Investment Objectives in Terms of Risk and Return
Return objectives are important to determine. They help to focus an investor on meeting his financial goals and objectives. However, risk must be considered as well. An investor may require a high rate of return. A high rate of return is typically accompanied by a higher risk. Despite the need for a high return, an investor may be uncomfortable with the risk that is attached to that higher return portfolio. As such, it is important to consider not only return, but the risk of the investor in a policy statement.

Factors Affecting Risk Tolerance
An investor's risk tolerance can be affected by many factors:

  • Age- an investor may have lower risk tolerance as they get older and financial constraints are more prevalent.
  • Family situation - an investor may have higher income needs if they are supporting a child in college or an elderly relative.
  • Wealth and income - an investor may have a greater ability to invest in a portfolio if he or she has existing wealth or high income.
  • Psychological - an investor may simply have a lower tolerance for risk based on his personality.
Return Objectives and Investment Constraints


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