6 Simplest Steps to Successful Portfolio Management

Portfolio management is challenging, but it's also exciting. Some people prefer to have their portfolios managed by a professional. However, it's not impossible to manage your own portfolio. It just takes time and a basic understanding of the process.

Portfolio management involves 6 steps in an ongoing process.
1. Determine Objectives/Constraints
2. Formulate a Strategy
3. Design an Investment Policy
4. Implement Asset Allocation
5. Monitor Performance
6. Evaluate Performance

As an ongoing process, it is the responsibility of the portfolio manager (whether that's you or a professional) to go through the process (beginning at "Determine Objectives and Constraints") and upon reaching the "Evaluate Performance" stage, start again.

Why is it an ongoing process? Because life is not static. People move, they change jobs, they get married, they get divorced, they get remarried, they have children, they make large purchases, they make wise decisions, they make unwise decisions, they are faced with windfalls and tragedies. Each of those (and many, many other) events will affect how they manage their portfolio.

Every individual has different needs and wants. The first step to successfully manage your investment needs is to identify them by drafting an investment plan. This plan should state your goals. It is simply a mission statement of what you endeavor to achieve. Be as specific as you can, so that you can determine what to invest in, and how your portfolio will be structured to realise your dream.

Knowing yourself is critical to creating and managing a portfolio that will do what you want it to do. This knowledge will help you set realistic future financial goals and will help you to decide how much risk to include in your investment strategy

There are several constraints that may work against your desire to build up a healthy nest egg. These are all challenges of having money. Unfortunately, many of them are unavoidable… but that doesn't mean that they're not manageable. The best thing to do is know that they exist and develop strategies to help you over come them. Some of the considerations include evaluating your Risk & Return Profile, Investment Time Horizon, Liquidity Requirement, Legal and Taxation Structure, etc.

And also, do you remember the popular saying, "Don't put all your eggs in one basket" ? The reason why you should achieve diversification in your portfolio is that the value of different asset classes tends to behave and perform very differently. Some assets move in tandem or in a similar direction with each other, while others move in opposite directions. What may surprise you is that for the same rate of return, you can actually combine different asset classes to achieve this expected return. Thus the secret to successful portfolio management is to create a portfolio by investing in different types of asset classes, that generate the lowest risk factor to achieve your investment objectives.

As you manage your portfolio, different factors will have an effect on its performance. The economy, for example, may go up or down and cause the value of your holdings to rise or fall. Perhaps you followed some advice from a friend on a "can't lose" stock and ended up losing. Whatever the case may be, it is crucial to monitor the performance of your portfolio at all times so that you can react if something happens.

We will review the 6 steps in our upcoming series of articles and I really hope you will benefit from it.