Investment Portfolio Management

​Investment Strategies

When an investor decides to invest in stocks or investment funds, he/she can choose the shares of a lot of listed companies. Those investments usually have different levels of risks and varying levels of returns. Since there are several and different choices of investments, the chances are higher for the investor to succeed if he/she had a specific strategy to choose between these investments. The investor can have an even better chance if he/she adopted several strategies so each one can fit a specific economic situation. For example: the investor can use a specific strategy when the interest rate is increased and another one when it is decreased. Any general investment strategy has several requests. First: how an investor should distribute his/her  investment assets on the different investment channels such as shares, precious stones or real estate. Second: the strategy should include the standards to buy the investments and another for the periods where the investor wants to keep those investments. Last: the investor should specify, in his/her strategy, the appropriate level of risk in every investment of those investments.

The investor can specify which of the investment strategies fits his/her personality, circumstances and investment goals. One of these strategies might, for example, include a method that focuses on acquiring growth stocks (shares with growing capital). He/she might also adopt another strategy that aims to preserve the capital by focusing on low risk investments. No matter what strategy the investor chooses, it should be consistent with his/her investment objectives such as retirement, buying a house, paying tuition, etc… a good example is if the investor is twenty years old and invests for retirement, he/ she would prefer a more open strategy with higher risks compared to an investor in his/her fifties investing for  retirement where his/her strategy would be more conservative.

Giving the strategy time

Once the investor specifies his asset allocation strategy, he/she should give it time to work. It is important for the investor to commit to the plans for them to work. It might be even better to commit to his/her asset allocation strategy for a full economic cycle keeping in mind to try to be flexible to change when other good investment opportunities arise.

Asset Diversification

Diversification, as asset allocation, is an important component in managing an investment portfolio. Asset allocation and diversification have similar goals and strategies which are allocating the money on different sectors and lower investment risks. Asset allocation is applied in allocating the capital in different investment assets such as stocks or liquid cash whereas diversification means buying a number of investments within one category of assets. For example if your investments had stocks in it, you should diversify your shares or investment portfolios to achieve enough diversification.

Diversification helps to eliminate guessing from the investment decisions. It is known that the increased demand for any shares cannot be predicted which makes asset allocation important. Usually investors cannot identify the companies with good management from the ones with weak management or pinpoint the companies that could have good performance in specific circumstances from those who have poor performance in the same circumstances. By having a diversified investment portfolio, the investment in a good company would overcome the bad consequences for the other weak companies.

Some investors prefer to diversify their investments based on specific indicator such as choosing secondary shares which represent smaller categories within a specific category. For example: to measure the company’s size, the shares can be split into smaller groups depending on the total market values. In general, variations in the market values reflect the differences in the expected growth, the price volatility and the possibility of surviving the economic setback. Usually the performance of small, medium and large shares vary periodically were the performance of each category is good in a period and weak in another. Apart from the size of the market values, there are other ways to sort the secondary shares categories including: type of activity, sector, and evaluation.

Rebalancing the Portfolio

An investor should maintain the asset allocation he/she chose in his/ her investment strategy to manage the portfolio until he/she thinks that the time has come to change it based on age or financial position. One of the requirements to sustain the current asset allocation strategy is to rebalance it or redo its allocation every now and then. Rebalancing a portfolio is very important because the market performance increases or decreases the assets’ value in some investments with time. For example if an asset of the assets in the portfolio increased in value compared to another asset, it would dominate on the portfolio’s performance and vice versa. As a result, an investment portfolio might expose its owner to higher levels of risk than what he/she asked for or lower long-term profits. 

Some investors rebalance their portfolios every year but experience shows that there is no specific schedule for rebalancing to follow. In general, the longer time an investors gives the investment strategy to achieve its goals, the less there is a need for rebalancing the portfolio. One of the determinants of the need to rebalance the investment portfolio is when the dominant and strongest asset’s percentage in the portfolio is over %10 exceeding the targeted allocation in the investment strategy. Hence, the investor should reinvest the excess money   (over %10) in other types of investment assets with low performance. Since the assets’ performance changes frequently, it can be assumed that the weakest kind to invest in today might be the strongest tomorrow. So what the investor is doing here is making use of the low prices and buys then sells later when the values are high.

When the investor decides it’s the right time to rebalance the portfolio, there are several ways to do so but the investor can prefer one on another. To rebalance the portfolio, the investor can:

  • Sell a part of the invested asset with increased value and then reinvest the profits in another asset that is not high yet.
  • Change how new invested money is added to the portfolio by placing it in other impaired assets until the investor finds the best allocation.
  • Increase the capital of the investment portfolio and place the increase to be fully invested in impaired assets.

Risk Causes

There are a lot of factors that could cause investment risk. The most popular is volatility where investment prices volatile to high and low levels without warning. This means that the price might go to less than the price the buyer paid to get it. The problem with volatility is that it cannot be predicted nor its effects on investment.  

Investment Portfolio Performance Follow-up

Follow-up on investment portfolios is considered important because it helps in making the necessary changes on the portfolio. For example, if some specific shares affected the performance of the portfolio and lowered it or increased the risk on it with more than what the investor is willing to take; he can dump them and invest in other. Also if the portfolio did not achieve the minimum of the return the investor wanted, he/she can partially or fully redistribute the investment assets or even increase his capital. Investors usually follow-up on their investment portfolios once a year.

The rules to follow up on the investment portfolio start by the investor following up on the return on investment for every group of companies that belong to a specific sector and compare it with the sector index and then specify the average for the whole portfolio.   If the investor has investment units in an investment portfolio then the investment company is the one who prepares the report on the portfolio’s returns. In case the investor owns shares or securities through an account at a company that conducts securities business then it will calculate the returns for the investor.