Portfolio Management

Portfolio is none other than Basket of Stocks. Portfolio Management is the art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance.

It is all about strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and many other trade offs encountered in the attempt to maximize return at a given appetite for risk.

From the above definitions it is evident that portfolio management is systematic management of securities and assets for achieving desired gains by balancing the risk. It is imperative to build a well-maintained portfolio in order to ensure that an investor succeeds in his/her endeavor. The basic rule of portfolio management is, "Don't pull all your eggs in one basket", which means not to put all your money ins scripts of one sector only but to diversify it.

The portfolio management process is the process an investor takes to aid them 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 that meets investor's goals and constraint requirements.

4. Monitor and update the plan: Both markets and investor's needs change as time changes. As such, it is important to monitor for these changes as they occur and to update the plan to adjust for the changes that have occurred.

RISK AND DIVERSIFICATION: DIVERSIFYING YOUR PORTFOLIO

Diversifying your portfolio might not guarantee against a loss but is the most important component to helping you reach your long-range financial goals while minimizing you risk. However, no matter how much diversification you do, it can never reduce risk down to zero.

There are three main things you should do to ensure that you are adequately diversified:

1. Your investment should be spread among many different investment vehicles such as cash, fixed deposit, stocks, mutual funds and perhaps even some real estate and precious metals.

2. Your securities should vary in risk. Picking different investments with different rates of return will ensure that large gains offset losses in other areas.

3. Your securities should vary by industry, minimizing unsystematic risk to small group or companies.

Portfolio construction is more of art than science. Portfolio management and construction is primarily based on actively weighting regional and sector allocations against a fund's underlying benchmark along with a thorough analysis of the risks associated with these weightings.

There are various steps in the construction of a portfolio:

1. The first is the decision on how to allocate the portfolio across different asset classes broadly as equities, fixed income securities and real assets. This asset allocation decision can also be framed in terms of investments in domestic assets versus foreign assets.

2. The second component is the asset selection decision where individual assets are picked within each asset class to make up the portfolio. In practical terms, this is where the stocks that make up the equity component, the bonds that make up the real asset component are selected.

3. The final component is execution, where the portfolio is actually put together. Here, the investors must weigh the costs of trading against their perceived needs to trade quickly. The importance of execution will vary across investment strategies.

Famous proverbs on portfolio management by few great speakers are:

1."Wide diversification is only required when investors do not understand what they are doing."-Warren Buffett

Meaning, diversifying is relevant. Once you have gotten your feet wet and have confidence in your investments, you can adjust your portfolio accordingly and make bigger bets.

2. "Every portfolio benefits from bonds; they provide a cushion when the stock market hits a rough patch. But avoiding stocks completely could mean your investment won't grow any faster than the rate of inflation."-Suze Orman

3. "No business in the world has ever made more money with poorer management."- Bill Terry

4. "I don't think a manager should be judged by whether he wins the pennant, but by whether gets the most out of the 25 men he is given." - Chuck Tanner

5. "If you are saving for the long run, it's actually a good thing when the market is down because the more shares you have, the more you can potentially make when markets rise. And over time-decades, not months-the markets rise more than they fall."-Suze Orman