Daniel Cole | Professional Portfolio Management and Asset Allocation: How to Build a Robust Investment Strategy


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Success as an investor depends on maintaining a varied portfolio. The success of any individual investor depends on their ability to identify an appropriate asset allocation that considers their unique investing aims and comfort level with risk. That is to say, your portfolio’s total value should be sufficient to cover all your anticipated capital needs and provide you with complete peace of mind. By taking a systematic approach, Daniel Cole believes investors can build portfolios that align with their investment plans.

Your investment portfolio will not be complete without careful consideration of asset allocation. Ultimately, it is one of the most important variables in determining your overall results, perhaps even more so than selecting particular stocks. Constructing a diversified portfolio that includes stocks, bonds, cash, and real estate is an ongoing endeavor. So, the asset allocation should always align with your current and future objectives.

 

What Exactly Is the Concept of Portfolio Management?

One definition of portfolio management is overseeing a collection of investments. Managing a portfolio entails purchasing and selling investments and engaging in other forms of trading. The process of selecting and monitoring a portfolio of investments in light of a client’s or investor’s long-term financial goals and risk tolerance, as determined by the manager.

To prevent putting the company at risk by taking excessive chances or misusing corporate resources, it is important to have a well-thought-out, structured, and systematic procedure to decide where the firm will make its investments.

If a company’s portfolio is not aligned with its strategic goals and ability to deliver, it will be impossible to manage it accurately and under control. So that these long-term investments do not disrupt the current business operations, they would avoid making any changes in the meanwhile.

 

How to Create a Successful Portfolio

Investors can build portfolios that align with their investment plans by taking a systematic approach. Here are some critical measures to take when using this strategy.

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The Art of Asset Allocation

The initial step in building a portfolio is understanding your current financial standing and long-term objectives. Factors such as age, the length of time investment has to grow, the available capital, and projected income demands, among others, are crucial.

Consider your character and level of comfort with danger as a secondary consideration. To what extent would you risk a financial loss to achieve larger gains? While it’s true that everyone dreams of a steady stream of profits, the high returns from some assets may not be worth the anxiety they cause if you can’t rest when they dip temporarily.

How you divide your investments depends on your existing circumstances, anticipated cash needs, and willingness to take risks. Taking on more potential profit comes with a higher potential for loss (this is known as the risk/return tradeoff). Instead of completely avoiding danger, you should figure out how to minimize it in light of your unique circumstances and way of life.

Completing the Portfolio

After deciding how to allocate your assets, you must allocate your money among the several asset types. This is, at its core, not complicated: stocks are stocks, and bonds are bonds.

However, the various asset classes can be further subdivided into subclasses, each with its unique risks and potential returns. The equity element of a portfolio could be split, for instance, between domestic and international stocks, industry groups, market caps, and other factors. Short-term and long-term bonds, government and corporate debt, and so on could all make up the bond.

The assets and securities you use to implement your asset allocation plan can be selected in several ways (though Daniel Cole encourages you always to consider the quality and potential of each investment you make).

Picking Stocks: Based on your tolerance for risk and the characteristics of your equity portfolio, select stocks from the appropriate industry, market capitalization, and classification. Use stock screeners to narrow down your options, and then do a more in-depth examination of each potential investment to weigh the benefits and drawbacks. The most time-consuming part of investing is keeping track of your holdings and reading up on the latest developments at each firm and in your chosen industry.

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Selecting Bonds – The coupon, maturity, bond type, credit rating, and interest rate climate are all relevant considerations when selecting bonds.

 

Checking the Balance of the Portfolio

Once you have a portfolio set up, Daniel Cole encourages you should regularly review it and rebalance it because market fluctuations can alter the proportions you originally chose. Quantitatively classifying your investments and calculating their proportion to the entire can help you evaluate your portfolio’s actual asset allocation.

Your current financial condition, future demands, and risk tolerance will likely change over time. You may have to make changes to your portfolio if any of the above occur. If your willingness to take risks has diminished, you may want to lessen your exposure to the stock market by selling some of your holdings. Alternatively, you may have reached a point where you feel comfortable with increased risk and your asset allocation calls for a modest portion of your portfolio to be invested in smaller, riskier companies.

Find the over- and underweighted holdings in your portfolio. Consider the case when you have 30% of your portfolio invested in small-cap shares, yet your asset allocation calls for only 15% to be allocated there. To rebalance, you must decide how much of this investment you may sell off and put into other asset classes.

 

Strategic Rebalancing

Decide which underweighted securities to purchase with the proceeds from selling the overweight securities after determining which securities to reduce and by how much. Use the methods from Step 2 to determine which securities are right for you.

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If you want to rebalance your portfolio but have equity investments that have grown significantly over the past year, you may have to sell all of them and pay a hefty capital gains tax. In this scenario, it could be more prudent to stop putting money into that asset class in the future while still putting it into other asset classes. Over time, you can lower your portfolio’s exposure to growth equities without incurring taxable gains.

Effective Asset Allocation Techniques

Daniel Cole presents several approaches to asset allocation here, along with an examination of their underlying management tenets.

 

Tactical Asset Management

A strategic asset allocation plan could appear rather strict in the long run. You could occasionally find it necessary to engage in short-term, tactical deviations from the mix to take advantage of unique or outstanding investing opportunities. This adaptability gives the portfolio a market-timing element and enables you to take advantage of economic situations that favor some asset classes more than others.

Since the strategic asset mix is returned after the anticipated short-term profits are realized, tactical asset allocation can be characterized as a moderately active strategy. The discipline required for this strategy is the ability to discern when short-term opportunities have passed their prime and then rebalance the portfolio to the long-term asset position.

 

Fixed-Weight Asset Allocation

Strategic asset allocation typically entails a buy-and-hold approach, even when the asset values change and the initial policy mix is departed. You might choose to use a constant-weighting strategy for asset allocation. You continuously rebalance your portfolio using this method. For instance, you might buy more of a particular asset if its value drops. And you would sell it if the asset’s value rose.

When using a constant-weighting or strategic asset allocation, there are no hard-and-fast guidelines on when to rebalance a portfolio. However, the general rule of thumb states that whenever any particular asset class deviates more than 5% from its initial value, you should rebalance the portfolio to reflect this change.


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