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The portfolio management process

The portfolio management process. The portfolio management process. Set objective and policy goals Examine and understand the environment Construct the portfolio: asset allocation & security selection Monitor and update. Individual investment objectives? . Popular belief:

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The portfolio management process

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  1. The portfolio management process

  2. The portfolio management process • Set objective and policy goals • Examine and understand the environment • Construct the portfolio: asset allocation & security selection • Monitor and update

  3. Individual investment objectives? • Popular belief: • Investments are aimed at “making money”

  4. Suggested strategies for “making money” • Put $1 in the bank at 3%. • Eventually you will become a billionaire • Put all of your earnings in the lottery. • Eventually you’ll hit the jackpot

  5. Goals vs. objectives • Financial Goals • Broad financial ends, such as, buying a home, paying for children’s education, etc. • Investment objectives • Stated in terms of risk and return - a function of goals, investment horizon etc.

  6. Investment objectives • Are dictated by risk tolerance and time horizon • Capital preservation • Income • Growth

  7. Individual investment objectives • Age considerations • Risk consideration

  8. Individual investor life cycle • Accumulation phase • Consolidation phase • Spending phase • Gifting phase

  9. Accumulation phase • Long-term goals • Retirement • Children’s education • Etc • Short-term goals • Car • House

  10. Consolidation phase • Long-term goals • Retirement • Short-term goals • Children’s education • Vacation • Etc.

  11. Spending phase • Long-term goals • Estate planning • Short-term • Life style • Gifts

  12. Gifting phase • Long-term goals • Estate planning • Short-term • Life style • Gifts

  13. Risk considerations • Factors: • Psychological makeup • Family situation • Income • Age

  14. Investment constraints • Liquidity needs • Tax concerns • Regulations • Unique needs

  15. Liquidity needs • Related to investment horizon & age • Longer horizons = accept less liquidity & more risk

  16. Tax concerns • Investors think in terms of after-tax return

  17. Regulations • Impose restrictions and constraints • Ex: • RRSP: Foreign content rule

  18. Unique needs • A function of each individual

  19. Asset classes • Classification according to risk and expected return characteristics • Stocks • Bonds • Risk-free investments

  20. Asset classes • Each class can be further divided into subclasses • Bonds: • Long-term corporate bonds • Long-term government bonds • Medium-term corporate bonds • Medium -term government bonds • Etc.

  21. Historical record: 1926-1998 (US)

  22. Historical record: 1948 -1998 (Canada)

  23. $ 357.3 TSE300 $ 36.4 Bonds $ 20.4 T-bills $ 8.4 Inflation 1945 1975 2000 Returns from investing $1: 1948-1999

  24. Asset allocation: Various countries

  25. Return 27% 22% 17% 12% 7% Standard deviation 20% 30% World stock markets annual rates of return and risk in local currency 1986-1997

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