Understand How to Manage Your Portfolio

Stock PortfolioPortfolio management is a complicated subject. I dare say it’s even more complicated than choosing what to invest in! I’ve written about how Warren Buffet likes to invest here, but how does he like his portfolio to look? I don’t think very many people know that! Portfolio management is what sets huge fund managers apart.

Let’s break this down into a simple step by step which we’ll dig into afterwards:

  • Create a mission statement that clearly specifies your goals and investment objectives.
  • Develop a strategy that enables you to reach your goals given the current stock market and interest rate environment.
  • Implement the plan. Invest in the securities, funds, and bonds that your strategy determined would help you reach your goal.
  • Consistently monitor your portfolio. Ensure funds/bonds are returning the appropriate yield and respond to changes in the investing environment.

Your portfolio is made up of all of your investments combined. This includes your 401k plan with your employer, your private IRA, your brokerage account, your home, etc. Essentially, anything you own of any substantial value is part of your portfolio.

To determine your desired portfolio composition, you must include a variety of factors. How long are you investing for? What are you investing for? How high is your risk tolerance, meaning, how much can you stand to see your investment decline if the markets pull back? First, you need an investment philosophy. You need to create your basic assumptions about your needs and goals.

Second, know that the markets and the major market players have more resources than you do. The markets are semi-strong which derives from economic theory to mean that they know all public information which is more than a common investor would know. The theory (loosely) says that only those who know non-public information will outperform the markets in the long term.

Once you have determined what you invest for, or your mission statement, you can begin creating a strategy. Your strategy will determine how you actually invest. What mix of bonds and stocks will you need to reach your goal?

The Goal of Portfolio Management

The goal is quite simple to say but complicated to execute on: Get to your desired anticipated return while minimizing the risk you take.

First and foremost, know that without risk, you can expect no return. There is a reason Treasury Bills yield so little! They carry such little risk that the US government doesn’t have to pay huge interest! The trick is to understand your own risk tolerance.

The key to determining your risk tolerance is as much how much reward you seek and also how much risk you’re willing to stomach. If the stock market drops by 10% tomorrow, are you willing to see your portfolio drop 10% in line with the market? Would you rather it drop 5% or would you be ok with it dropping 15% in the hopes that you’d see more upside when the market recovers?

There are many ways to go about this. First, would you be receptive to seeking a low-fee passively managed portfolio consisting of ETFs tied to ETFs? Generally speaking, passive management is for an investor who would accept market return. Or would you rather seek higher reward and pay extra fees for an actively managed fund?

As always, look forward to hearing your thoughts. Did I miss something? See any errors? Discussion in general is always welcome!


14 Responses to Understand How to Manage Your Portfolio

  1. Paul says:

    I think a low-fee and passively managed portfolio is a great way for beginners. That way a solid foundation can be built and later the investers can branch out into other areas.

    • Jay says:

      I completely agree. Either that or invest in massive Dividend Aristocrat and use a DRIP.


      • Paul says:

        Nobody educated me on this stuff when I started. So I made some mistakes and bought into several loaded funds. After seven years I got educated and made the switch to index funds. Haven’t purchased into a DRIP yet.

        • Jay says:

          DRIPs are great. Do some reading on them!

          • Paul says:

            Do you have any companies you recommend?

            • Jay says:

              I’m not a financial advisor so I can’t really answer that since everyone’s situation is different. These tips are just one small piece of the puzzle. Personally, I invest in a lot of ETFs that track the market indexes since they’re low-cost. But again, investments vary from person to person depending on age, financial situation, marital status, etc.

  2. Kassandra says:

    I currently invest in more aggressive index funds and ETF’s but I’m trying to broaden my investment knowledge so that I feel more confident when I may decide to add something new to the mix.

  3. Passive every time. Long steady investment over decades has shown to be extremely effective. Only those that panic and don’t see it as a buying opportunity and instead pull their money out lose money. The market always goes up after going down.

    • Jay says:

      Exactly. And I will buy the entire way it’s going down. Buying at a discount is the way to go! Buffet said he was buying during the selloff this Tuesday (9/30/14).

  4. Totally agree with the need for an investment philosophy and your own strategy. The factors you need to consider when you look at yourself and ask “what do I want, what do I need, what can I handle, how am I likely to react to XYZ” etc are to me far and away the most important. Unfortunately too many people start by asking “what should I invest in?”. I think there’s huge benefits for most investors in ETFs and Index funds, as buying individual stocks takes a greater understanding of businesses as well as yourself, but I thorougly enjoy the challenges and the process of it all!
    Jason @ Islands of Investing recently posted…Become a ‘Value Trap’ escape artistMy Profile

    • Jay says:

      It’s just hard to ever convince yourself that you know better than the guys on Wall Street. Sure I pick individual stocks, but I rarely (if ever) think “Oh man! How is this so undervalued!”

  5. arik says:

    This is my 2015 portfolio http://www.openhedgefund.com/fund_detail?fundid=279

    Any suggestion about weights?

    • Jay says:

      I’m not in the business of giving advice (for liability issues) so I’m not going to take a look at that, just to protect myself. But typically, for my own personal experience and given that everyone has a different situation, am invested in a wide basket of stocks and funds to not over expose myself to any single industry.

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