Investment Business Plan/Portfolio Management

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Portfolio Management is one of the most important aspects of investing, particularly for the investor with a maturing portfolio. Think of the portfolio needing attention on three levels. 1) Pay attention to individual stocks held in the portfolio. 2) Pay attention to the asset allocation in order to maintain diversity and balance within the portfolio. 3) Pay attention to what is happening to the broad market and to the sectors within the broad market.

Monitor Individual Stocks[edit]

Let's take the first assignment, that of paying attention to the individual stocks held in a portfolio. One very useful tool that aids in this monitoring process is Toolkit 5. Built into this software is a portfolio management section. To put this portfolio management section of Toolkit to use one must first complete a Stock Selection Guide (SSG) analysis on each stock held in the portfolio. Once one is familiar with the product it does not take long to complete this assignment.

Toolkit 5 has the option to build a library of stocks. Set up a library to include all stocks held in the portfolio with the correct number of shares. Once this is accomplished Toolkit 5 provides an Overview of the portfolio. This shows the user the portfolio Total Return, U/D ratio, Relative Value etc. Once one sees the Overview it is time to check the Alerts. If the Alert screen comes up blank, you are doing something good in the selection of stocks. Pay particular attention to those stocks yielding a Defensive alert. Go in and look at the PERT sheet to see what is going on with the stock. Find out if Sales and or Earnings are in decline. Determine what is causing the Defensive alert signal as it may be time to purge the stock from the portfolio.

Monitor Asset Allocation[edit]

Active Asset Allocation[edit]

1.0 Portfolio Tilt

Harold R. Evensky in his book, "Wealth Management: The Financial Advisor's Guide to Investing and Managing Client Assets" does a fine job in defining Portfolio Tilt. He writes, "This is a strategy designed to add value by overweighting an investment class or style in order to take advantage of a perceived market anomaly. An example would be the overweighting of small-cap stocks in January to take advantage of the January effect. A more general example would be the permanent overweighting of the portfolio with low price/book stock." This latter strategy is one where the investor would skew an asset allocation to the value side of the investment equation. This is a strategy preferred by many asset allocators as historically, value stocks tend to outperform growth stocks.

Evensky continues to write, "One quasi strategy that straddles market timing and portfolio tilt is sector rotation, i.e., the technique of tilting the portfolio in favor of market sectors that are expected to benefit most from the next economic wave." More on this later when we look at Exponental Moving Averages (EMA) and Point & Figure (PnF) charts.

2.0 Dynamic Asset Allocation

Dynamic Asset Allocation (DAA) is a mechanical method of rebalancing a portfolio due to market movements. When an asset class moves out of its target ranges, the investor responds by bring "out-of-line" asset classes back into balance. The sample asset allocation spreadsheet is a great aid in helping the investor accomplish these portfolio rebalancing activities. There are some studies done by William Bernstein that show one should not rebalance a portfolio more than once every year. While the asset allocation spreadsheet permits one to track what is going on daily, I highly recommend no rebalancing occur more than once a quarter.

3.0 Tactical Asset Allocation

Tactical Asset Allocation (TAA) is similar to DAA in that it requires periodic rebalancing of the portfolio. Instead of a mechanical rebalancing activity due to the asset classes moving out of their target ranges, TAA requires the investor to know something about what is happening to sectors and asset classes of the market. When is it time to shift assets to the value or growth sides of the portfolio equation? When is it time to be in small-cap vs. large-cap stocks? Is there a time to invest more heavily in REITs or international investments? TAA relies on the assumption that different asset classes will revert to the mean. If an asset class is a hot performer one year it is highly unlikely it will return the same performance a second or third year.

4.0 Toolkit 5 Alerts