The portfolio management process

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The portfolio management process
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The portfolio management process

• Set objective and policy goals
• Examine and understand the environment
• Construct the portfolio asset allocation
  security selection
• Monitor and update

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Individual investment objectives?

• Popular belief
• Investments are aimed at making money

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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 youll hit the jackpot

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Goals vs. objectives

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

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Investment objectives

• Are dictated by risk tolerance and time horizon
• Capital preservation
• Income
• Growth

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Individual investment objectives

• Age considerations
• Risk consideration

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Individual investor life cycle

• Accumulation phase
• Consolidation phase
• Spending phase
• Gifting phase

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Accumulation phase

• Long-term goals
• Retirement
• Childrens education
• Etc
• Short-term goals
• Car
• House

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Consolidation phase

• Long-term goals
• Retirement
• Short-term goals
• Childrens education
• Vacation
• Etc.

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Spending phase

• Long-term goals
• Estate planning
• Short-term
• Life style
• Gifts

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Gifting phase

• Long-term goals
• Estate planning
• Short-term
• Life style
• Gifts

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Risk considerations

• Factors
• Psychological makeup
• Family situation
• Income
• Age

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Investment constraints

• Liquidity needs
• Tax concerns
• Regulations
• Unique needs

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Liquidity needs

• Related to investment horizon age
• Longer horizons accept less liquidity more
  risk

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Tax concerns

• Investors think in terms of after-tax return

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Regulations

• Impose restrictions and constraints
• Ex
• RRSP Foreign content rule

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Unique needs

• A function of each individual

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Asset classes

• Classification according to risk and expected
  return characteristics
• Stocks
• Bonds
• Risk-free investments

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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.

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Historical record 1926-1998 (US)
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Historical record 1948 -1998 (Canada)
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Returns from investing 1 1948-1999
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Asset allocation Various countries
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World stock markets annual rates of return and
risk in local currency 1986-1997