Every year from mid-October through early December, you are asked to review your health care plan. Based on any life changes, you decide if the current plan fits your needs. If not, you make the appropriate updates to protect yourself and your family.
But how often do you review your portfolio management / manager strategy and/or performance? Do you even know where to begin? In order to form realistic expectations for your portfolio, you should understand the process used by the manager.
In general, a portfolio manager will use the following six-step process:
- Determine the client’s objective: The portfolio manager conducts an investigation to determine goals and objectives of the investor. This interview includes finding information about any potential risks the investor is willing to take.
- Choosing the appropriate asset classes: The manager determines which asset class (i.e., bonds, equities, real estate, etc.) best address the investor’s objectives.
- Conduct strategic asset allocation (SAA): During this step in the process, the manager establishes a weight for each asset class based on risk and rate of return trade-offs (compatible with investor’s wishes). You should review this step periodically. The weights may change during the investment period because of asset performance.
- Conduct tactical asset allocation (TAA) or insured asset allocation (IAA): These allocation strategies are different methods to adjust asset weights. The TAA makes changes based on market opportunities. The IAA method makes adjustments based on the wealth of the client at the time of evaluation.
- Manage risk: By establishing asset weights, the portfolio manager has control over the amount of risk of the portfolio in the following areas: security selection risk, style risk and TAA risk.
- Measure performance: Portfolio performance can be measured using the Capital Asset Pricing Model (CAPM). This model describes the relationship between the expected return and the risk of investing.
To get a more detailed explanation on this process or portfolio management / manager in general, please contact Westwood Holdings Group, Inc. .
