What Is a Portfolio Plan?

A portfolio plan is an overall strategy that guides day-to-day decisions on investing for the long term. Portfolio planning takes into account the investor's goals and tolerance for risk, among other factors.

A portfolio plan guides the investing decisions of large pension funds and high-net-worth individuals but its principles can be adapted for use by any individual or family concerned about saving for future needs and goals.

Understanding the Portfolio Plan

A portfolio plan is a blueprint for selecting investments that spells out an investor’s goals and expectations as well as risk tolerance. Other factors can include the person's investment horizon, potential liquidity needs, and tax burden.

Key Takeaways

  • A portfolio plan is an overall strategy that guides day-to-day decisions on investing.
  • The plan specifies the mix of investments, from very conservative to very risky, that is most likely to get the investor to specific financial goals.
  • Risk tolerance is a key consideration in a portfolio plan.

These are among the factors that determine the plan's allocation among assets that have varying degrees of potential profits and risks.

For example, a couple in their 40s with children approaching college age cannot risk investing most of their money in so-called aggressive stock funds that might suffer steep losses just when the money is most needed. But with retirement far in the future, they might want some of their money in that aggressive fund while most is invested in relatively conservative choices. The same couple, when they reach their 70s, might want most of their money in income-producing investments that contribute to their monthly retirement income.

This is the basis of portfolio allocation, a determination of the short- and long-term goals and needs of an investor and which investments are most likely to get them there.

Other Considerations

A professional portfolio plan also contains guidelines for hiring and firing outside money managers, a decision-making or governance structure, and an indication of how often the plan should be reviewed.

Are you risk-tolerant or risk-averse? The answer is key to your portfolio plan, and it may change over time.

For investors working on behalf of beneficiaries or donors, a solid portfolio plan is a good risk management tool. It serves as a checklist to ensure prudent investment and can help shield investors against lawsuits claiming a breach of fiduciary duty in the event of large losses.

Creating a Portfolio Plan

An individual investor can construct a portfolio plan alone or with the help of a professional investment advisor.

A strong plan includes a statement of purpose, a decision-making structure, investment philosophy, investment objectives, investment strategy, risk philosophy and tolerance, and a portfolio monitoring process.

Real-Life Example of a Portfolio Plan

All of the factors listed above can be found in the investment policy of the Contra Costa County Employees’ Retirement Association. This is a large pension fund that invests billions of dollars on behalf of its beneficiaries, the employees and retirees from public service jobs in this California county.