Subject 3. Steps in the Portfolio Management Process

Step One: The Planning Step

The first step in the portfolio management process is to understand the client's needs and develop an investment policy statement (IPS).

The IPS covers the types of risks the investor is willing to assume along with the investment goals and constraints. It should focus on the investor's short-term and long-term needs, familiarity with capital market history, and investor expectations and constraints. Periodically the investor will need to review, update, and change the policy statement.

A policy statement is like a road map: it forces investors to understand their own needs and constraints and to articulate them within the construct of realistic goals. It not only helps investors understand the risks and costs of investing, but also guides the actions of portfolio managers.

Step Two: The Execution Step

The second step is to construct the portfolio. The portfolio manager and the investor determine how to allocate available funds across different countries, asset classes, and securities. This involves constructing a portfolio that will minimize the investor's risk while meeting the needs specified in the policy statement.

Step Three: The Feedback Step

The process of managing an investment portfolio never stops. Once the funds are initially invested according to plan, the real work begins: monitoring and updating the status of the portfolio and the investor's needs.

The last step is the continual monitoring of the investor's needs, capital market conditions, and, when necessary, updating the policy statement. One component of the monitoring process is evaluating a portfolio's performance and comparing the relative results to the expectations and requirements listed in the policy statement. Some rebalancing may be required.

User Contributed Comments 3

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ankurwa10: IPS --> Construct --> Update (ICU - horrible acronym, but works for me)
leon121: nice acronym
joeclark: maybe needs to highlight (bold) that there are subsets on each steps similar to what they did in CFAI.