Portfolio Management and Evaluation

Investment Snapshot

* With a portfolio of diverse investments, total returns can be increased and total risk lowered more than with individual investments.
* The number of stocks held in a portfolio determines the level of risk and return characteristics of the portfolio.

INVESTOR’S OBJECTIVES

The aim of portfolio management is to assemble individual investment securities in a portfolio that conforms to the investor’s level of risk and rate of return. The investor’s objectives are the most important guidelines to managing an investment portfolio. The main types of objectives for a portfolio are preservation of principal, providing income, or seeking capital growth. For example, an investor pursuing capital growth for a portfolio might allocate a greater portion of the portfolio’s assets toward growth stocks, small-cap stocks, and real estate. From time to time the investor would evaluate the performance of the portfolio with regard to risk and return as to whether the portfolio is meeting his or her investment objectives.

An investor seeking income with some capital growth from a portfolio would allocate a greater portion of the portfolio to bonds, along with some stock investments. For example, a total portfolio amount of $600,000 might be invested in the following manner: $500,000 in bonds yielding 6 percent, which would generate income of $30,000 per year, and $100,000 in 4 percent dividend-yielding stocks, which would bring in an additional $4,000 in income per year. By investing a small percentage of the portfolio in stocks rather than 100 percent in bonds, this investor is seeking potential capital growth to the portfolio and also minimizing the total risk of the portfolio. If large-cap stocks increase by 8 percent for the year, the value of the stock portfolio would grow to $108,000, which would more than offset the reduction in income from investing in lower-yielding stocks than bonds.

Investors continually must be aware that not only do their objectives and individual characteristics change over time, but their investments must be monitored owing to financial conditions and markets. Companies change, and their securities may no longer fulfill the criteria for which they were purchased. Not all investments in the portfolio realize their projected returns, so investors managing their portfolios might need to sell and replace them with other investments. This does not mean that all or most of the investments in the portfolio should be turned over continuously. Only those investments that are unlikely to achieve the objectives specified should be liquidated.

KEY CONCEPTS
* Investors’ objectives
* Asset allocation
* Selection of individual investments

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