Dividend Value Builder Newsletter

Investment Portfolio Management Basics: Risk, Asset Allocation, & Investing Strategies

by | Portfolio Management

Investment Portfolio Management

Investment Portfolio Management

Investment Portfolio Management is the art of putting together and managing various investments to meet specific goals. We will examine management strategy choices, asset allocation and investing strategies, and management of risk as they pertain to management of an investment portfolio.

Management Strategies

Passive Management

Passive management is for investors willing to accept market returns.  Using a fixed asset allocation with a portfolio comprised of index funds would be examples of passive management.

This is the management style that became popular in the 1990’s because most active mutual fund managers under performed market indices.  What people are missing is that passive investing works best in a bull market such as the 1990s. It doesn’t work so well in bear markets.

In addition, many active mutual fund managers use risky strategies such as momentum investing (see below). All active strategies shouldn’t be avoided just because some strategies don’t work. Many active value investing managers are successful.

Active Management

In active management the portfolio manager attempts to meet investment objectives through asset allocation investing and strategies that fit the portfolio owner.  Let’s take a close look at these strategies and hopefully help you decide what works for you.

Asset Allocation Strategies

Strategic Asset Allocation

In a strategic asset allocation the portfolio mix is fixed according to the investor’s profile. A popular mix would be 60% equities, 30% bonds, and 10% cash.  This would be considered passive management. (As a value investor my problem with a strategic asset allocation is that it ignores the most important variable: valuation).

Tactical Asset Allocation

In a tactical asset allocation the portfolio mix is not fixed but can be changed when conditions change. Risk is managed on a continual basis through portfolio rebalancing.

I prefer to put the most weight on valuation in selecting my target asset allocation. When an assets valuation is high (i.e. equities in 2000) my target equity allocation would be lower than normal. When an assets valuation is low (i.e. equities in March of 2009) my target equity allocation would be higher than normal.

Investing Strategies

Value Investing

The objective of value investing is to purchase assets that trade at a discount to their intrinsic value. The main idea of value investing is that the price you pay matters.

For example, you can’t just buy a stock because it represents a great company. The price of the stock may be overvalued because it has been bid up. Buying the stock at the high price will greatly reduce your long term returns and increase the chances of losing money.

Contrarian Investing

Similar to value investing, contrarian investors try to buy assets that are bargains, but also attempt to use behavior science studies that measure technical indicators such as consumer sentiment.

Contrarians will do the opposite of what “the herd” is doing. This is the theory: If 95% of investors believe an investment asset is moving in a certain direction, then they have already acted and there is little or no catalyst to propel the asset in the same direction.

Growth at a Reasonable Price

Investors who subscribe to growth at a reasonable price invest in growth companies but attempt to exclude putting stocks in the portfolio that are extremely over valued.

Growth Stock Investing

This strategy advocates purchasing companies with above average earnings  growth regardless of valuation.

Momentum Investing

This is strategy of buying stocks that have done well in a short period of  time (i.e. 3 – 12 months) and selling stocks with poor momentum. This strategy gained popularity in the 1990’s but destroyed many investor portfolios in the 2000 dot com bust.

Risk Management

Every investor should employ portfolio risk management strategies that include:

Diversification Rules

Investment diversification reduces the over all risk of a portfolio. I recommend you set up definitive rules and abide by them. I never put more than 5% of my portfolio in any one stock, or 15% in any one fund or ETF, or 25% in any one industry. Diversification lowers portfolio volatility without reducing expected returns.

Maximum Portfolio Drawdown

How much of your investment portfolio you are willing to lose; or maximum portfolio drawdown, is a measurement of a portfolio decline from a peak to its lowest point. This is critical risk management concept that very few investors give consideration to. Develop a policy and you will sleep better at night, and improve your investing skills.

Investment Rules and Strategies

I have in writing stratgies and rules to guide me in my portfolio management. Having a developed list of rules and strategies will keep you focused. You can read them here:
32 Investment Strategies and Rules To Make You A Better Investor


Minimize Large Portfolio Drawdowns

Invest With Confidence in Less Time  -  Manage Your Portfolio Without Behavioral Errors

While Arbor Investment Planner has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability, or completeness of third-party information presented herein. The sole purpose of this analysis is information. Nothing presented herein is, or is intended to constitute investment advice. Consult your financial advisor before making investment decisions.

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