Portfolio planning involves the process of strategizing the construction of an investment portfolio. Earlier, Anand Jayapalan had pointed out that an investment portfolio should typically be planned based on the investment time horizon, risk tolerance and expected returns of an investor. Developing an investment portfolio requires a deliberate and precise portfolio-planning process. This process broadly involves the following steps:
- Step 1: Assess the current situation: Planning for the future requires having a clear understanding of an investor’s current situation in relation to their financial goals. This involves a meticulous evaluation of current assets, liabilities, cash flow, and investments of the investor, and aligning them with their key objectives. It is crucial to clearly define and quantify goals to enable the assessment to identify any disparities between the existing investment approach and objectives. This phase should encompass an open conversation about the investor’s values, beliefs, and priorities, as these elements play a pivotal role in developing an investment strategy.
- Step 2: Establish investment objectives: This step involves identifying the risk return profile of an investor. Determining the level of risk an investor can and is willing to assume, as well as how much volatility they can withstand, is important to creating a portfolio strategy that can deliver the required returns with an acceptable level of risk. Subsequent to establishing an agreeable risk-return profile, benchmarks can be set to monitor the portfolio’s performance. Regularly assessing the portfolio against these benchmarks allows for minor adjustments to be made as needed.
- Step 3: Determine asset allocation: By making use of the risk return profile, an asset allocation strategy can be used. Investors can make their choice from varied asset classes and investment options. Their goal should be to allocate assets in a way that achieves optimal diversification while also targeting the expected returns. Investors may also assign percentages to varied asset classes like cash, bonds, stocks and alternative investments, on the basis of an acceptable range of volatility for the portfolio.
- Step 4: Choose investment options: Individual investments are chosen on the basis of the parameters of the asset allocation strategy. The specific investment types chosen by an investor would largely rely on their preference for active or passive management.
Earlier, Anand Jayapalan had mentioned that after properly implementing an investment portfolio plan, investors should take steps towards managing it as well. This would include monitoring the investments and the performance of the portfolio, relative to the benchmarks. Regular reporting of investment performance is essential, and is usually done on a quarterly basis. An annual review of the portfolio plan is also quite important. The circumstances and objectives of an investor may considerably change over the span of a year and hence it is vital to assess the portfolio plan with time to check if any changes are needed.. The portfolio review assesses whether the allocation still aligns with the investor’s risk-reward profile. If not, the portfolio can undergo rebalancing. This involves the sale of investments that have met their targets and the acquisition of investments with higher upside potential.
