PORTFOLIO MANAGEMENT AND DIVERSIFICATION Portfolio management is a conglomeration of securities as whole, rather than unrelated individual holdings. Portfolio management stresses the selection of securities for inclusion in the portfolio based on that security’s contribution to the portfolio as a whole. This purposes that there some synergy or some interaction among the securities results in the total portfolio effect being something more than the sum of its parts. When the securities are combined in a portfolio, the return on the portfolio will be an average of the returns of the securities in the portfolio. For example, if a portfolio was comprised on equal positions in two securities, whose returns are 15% and 20%, the return on the portfolio, will the average of the returns of the two securities in the portfolio, or 17.5%. From this we will discuss the process of creating a diversified portfolio. The diversified portfolio is a theory of investing that reduces the risk of losing all your money when “all your eggs” are not in one basket. Diversification limits your risk an over the long run, can improve your total returns. This is achieved by putting assets in several categories of investments.
The portfolio process is as follows:
1. Designing an investment objective;
2. Developing and implementing an asset mix;
3. Monitoring the economy and the markets;
4. Adjusting the portfolio and measuring the performance
Due to the intensity of each of the four items, we will be covering only the first two.
1. Investment Objective:
This topic is broad and contains three major divisions. They are foundation objectives, constraints and major objectives.
Foundation Objectives: These objectives generally receive the most attention from investors and are determined by thorough determination of your needs, preferences and resources.
Return – you need to determine whether you p...
Wall Street 101, www.familyinternet.com
Learning to Invest, www.learningtoinvest.com
Your Money Coach, www.yourmoneycoach.com