What is Portfolio Management?

When engaging with a client, it is essential to have all of the relevant information about their organization to make the best impact on their portfolio.

To build a proper portfolio, it is vital to understand:

• What are your goals?
• What funds are available to invest?
• What is your timeframe?
• What is your risk tolerance?

Once an advisor has a clear picture of their situation, goals, and investment needs, they are able to draft an Investment Policy Statement.

However, once these items are identified, it is vital to continually meet with the client to review the portfolio's performance as well as the client's goals.

As time progresses, the goals may change, thus impacting the overall portfolio strategy.

An Investment Policy Statement is a document created to govern investment decision-making after understanding the needs of a client.

It is not a legally required document, rather, it is a document that outlines investment guidance, allowing the portfolio advisor to act on behalf of the client within general rules.

This document gives written approval within set limitations of what the advisor can and cannot do on behalf of the client.

The document is drafted by the investment advisor and the client to describe the strategies employed to meet investment objectives.

It is important to have an IPS because if the portfolio manager has any questions about suitability, they can refer back to the IPS to see if the portfolio investment strategies are a strong fit.

The Investment Policy Statement should define the following core objectives:

• The plans investment philosophy and objectives
• Who is responsible for selecting and monitoring investments
• How the plan forms an investment menu
• How the plan will benchmark investments
• What will cause the plan to change investments and how the process will be managed

Once the IPS is completed and discussed with the client, it should be signed and reviewed annually to ensure it is still accurate.

Proper fiduciary protection is vital for any organization investing assets.

If proper policies and procedures are not put in place or followed, an organization could be personally liable for imprudent investment choices.

As such, setting up fiduciary protection correctly can minimize your risk and liabilities.

While monitoring a portfolio, a portfolio manager will take several criteria into consideration when evaluating a portfolio's performance toward your financial goals:

• Risk Assessment
• Asset Allocation
• Diversification
• Investment Performance

The advisor should alert the organization when funds start showing red flags, alerting changes that may need to be made, and provide potential alternatives available.

It is vital that asset allocation and diversification are reflective of your risk tolerance.

Depending on your risk tolerance will directly impact how the portfolio's investments are allocated and diversified.

A portfolio that is extremely conservative versus one that is extremely risky will have completely different funds within them.

If the portfolio is not properly allocated, you could be at risk of losing your investments.

The three most common asset allocations are stocks, bonds, and cash.

It is important for a portfolio manager to choose the proper weights of each allocation.

By reviewing the Investment Policy Statement and ongoing discussion with the client an advisor can determine what the proper allocation weights are.

Diversification is the practice of owning multiple assets that are not closely correlated with each other.

This is to prevent the entire portfolio from going down if a few of the assets do not perform well.

When done well, diversification could increase a portfolio's overall expected return while minimizing risk.