TTG Financial utilizes asset allocation models and sophisticated technical tools to construct a target allocation for each Investor. This allocation will reflect both the Investor’s tolerance to market volatility, personal goals and expectations, trends in the Stock Market and Economy in general and the investor general tolerance to risk. These include regular Brokerage accounts, Trust accounts, Corporate accounts, and all Qualified accounts, which include IRA rollovers and 401k Rollovers.
Portfolio management is also a process of choosing the appropriate mix of investments to be held in the portfolio and the percentage allocation of each of those investments. Asset classes could include a mix of stocks, bonds and cash and these might be held in some combination of individual stocks, bonds, mutual funds or ETFs.
The goal of portfolio management is to manage this collection of investments in a manner that is consistent with the investor’s risk profile, goals and their time horizon for needing the money.
Portfolio management should also dovetail with the investor’s overall financial objectives. These could include saving for retirement, for the education of the investor’s children or saving for a goal like buying a home. It is not unusual for an investor to have multiple financial objectives that may be tied to their investments.
Some key elements of portfolio management include:
Diversification refers to having a mix of investments that are not all highly correlated to one another or to the general market. The reason for having investments with a low correlation to other holdings in the portfolio is to try to protect the entire portfolio from a large loss whenever the stock market, or a certain sector, moves downward.
For example, stocks and bonds have a low and, in some cases, a negative correlation to one another. This means that the market and economic factors that cause price movements in stocks will have little or no impact on the price movement in bonds.
Asset allocation refers to how an investor divides the allocation in their investment basket. Proper asset allocation is a key element in portfolio management. Asset allocation is about risk management and the mix of assets in a portfolio can help reduce risk in line with the risk tolerance of the investor.
Over the years, several studies have pegged asset allocation as the key determinant of both the return of a portfolio and the volatility of that portfolio.
Asset allocation is a good start, but a key part of portfolio management is rebalancing the portfolio periodically back to the target asset allocation. Over time the actual performance of investment holdings in the various asset classes within the portfolio will perform at different levels relative to each other. Perhaps small cap stocks will lead the pack for a couple of quarters, but then emerging market stocks or technology will experience a period of relative outperformance.
Over time differing returns will cause the asset allocation to deviate from the investor’s original target allocation. This can cause the portfolio to assume more or less risk than desired. Periodically the portfolio should be rebalanced back to the target allocation. This can be done by buying and selling holdings as needed or by using new money added to the portfolio if applicable.
Tax Efficient Investing
If an investor’s portfolio includes investments in both tax-deferred (or tax-free in the case of a Roth account) retirement accounts and in taxable accounts, tax efficient investing should be a consideration. This refers to which types of assets are held in which accounts.
Long-term capital gains taxes as well as those on qualified dividend payments are often less for many investors than taxes on ordinary income from sources including interest. Investments held for more than a year qualify for preferential long-term capital gains rates on any gains from the sales of these investments. These factors may favor holding more equity related investments in taxable accounts with a heavier concentration of interest generating investments, such as bonds and other fixed income vehicles, in tax-deferred accounts.
The concept of asset location should be integrated with an investor’s overall asset allocation as part of the portfolio management process.
Why Is Portfolio Management Important?
Investing is not a set-it-and forget-it proposition. Portfolio management means monitoring things on a regular, consistent basis. Additionally, Investor circumstances can and will change. Their goals and objectives can change with the passage of time and life changes and these changes might call for a portfolio adjustment.
A well thought out and tactically constructed portfolio is very important. Some investors simply accumulate a number of individual holdings with little thought as to how all of their various investments work together. This can lead to being over-allocated in a single area which can expose the investor to more risk than they might realize they are assuming, and when you think of risk…think volatility.
Investors are wise to take a portfolio management approach to their investments, whether they do this themselves or hire professional help. A portfolio-focused investment approach blends the right mix of investments to help investors fund their financial goals, while taking their time horizon to meet those goals and their risk tolerance into account. A well-managed portfolio will provide investors with the diversification needed to help achieve their investment goals and is a part of a good overall financial plan.