The process of investment portfolio management always starts with the investor and understanding his or her needs and preferences. For a portfolio manager, the investor is a client, and the first and often most significant part of the investment process is understanding the clients needs, the clients tax status and most importantly and his or her risk preferences. For an individual investor constructing my own portfolio, may seem simpler, but understanding ones own needs and preferences it is important the first step as it is for the portfolio manager.
I divided in three parts about the portfolio construction:
• The first of these is the decision on how to allocate the portfolio across different asset classes defined broadly as equities, fixed income securities and real assets
• The second component is the asset selection decision, where individual assets are picked within each asset class to make up the portfolio. In practical terms, this is the step where the stocks that make up the equity component, the bonds that actually make up the fixed income component and the real assets that make up the real asset component are selected.
• The final component is execution, is where the portfolio is actually putted together. Here I must weigh the costs of trading against the perceived needs to trade quickly. While the importance of execution will be different across investment strategies, there are many investors who really fail at this stage in the process.
Evaluate portfolio performance
The final stage of the process, and usually the hardest one for professional money managers, is performance evaluation. Investing is after all focused on one objective and one objective alone, which is to make the most money you can, giving me particular risk preferences. The performance evaluation is very important to the individual investor who constructs his or her own portfolio.