Portfolio Planning Process
Portfolio planning involves the process of strategically managing and optimizing a collection of investments to achieve particular objectives and maximize returns while minimizing risk. Previously, Anand Jayapalan had spoken about how there are very few things more daunting than developing a long-term investment strategy that allows people to invest with confidence about their future.
Developing an investment portfolio involves a precise portfolio-planning process. This process ideally comprises of the following steps:
-
Assess the current situation:
- Trying to plan for the future requires having a good understanding of the current situation of an investor in relation to where they want to be. Conducting a thorough assessment of current assets, investments, liabilities and cash flow is imperative for portfolio planning. Investors need to clearly define and quantify their goals so that assessments can effectively identify gaps between the current investment strategy and the stated goals. This step requires a proper discussion about the priorities, beliefs, and values of the investors, all of which ultimately set the course for creating an investment strategy.
-
Establish investment objectives:
- To identify the risk return profile of the investors, establishing well-rounded investment objectives is immensely vital. One has to determine how much risk the investors are willing and able to assume, as well as the level of volatility they can withstand to create a portfolio strategy that can deliver returns with an acceptable level of risk. After an acceptable risk-return profile is created, benchmarks can be effectively established for tracking the performance of a portfolio. Tracking the performance of a portfolio against benchmarks allows smaller adjustments to be made along the way.
-
Determine asset allocation:
- Investors can effectively create an asset allocation strategy by making use of the risk-return profile. Selecting from distinctive investment options and asset classes helps investors to allocate assets in a manner that achieves optimum diversification while targeting the expected returns. Investors may even assign percentages to varied asset classes, starting from cash and bonds to stocks and alternative investments, on the basis of acceptable range of volatility for the portfolio. Asset allocation strategy is ideally based on the snapshot of the current situation and goals of the investors, and is generally adjusted as life changes takes place.
-
Select investment options:
- Individual investments are usually chosen on the basis of particular parameters of the asset allocation strategy. The investment type selected ideally depends on the preference of the investor for active or passive management. An actively managed portfolio generally comprises individual stocks and bonds, if there are enough assets to ensure optimum diversification. On the other hand, smaller portfolios may achieve proper diversification through professionally managed funds like mutual funds or exchange-traded funds.
The management process starts off after implementing a portfolio plan. This includes monitoring the investments and measuring the portfolio performance. Earlier, Anand Jayapalan had pointed out that reporting investment performance at regular intervals and reviewing the portfolio plan annually is important for efficient portfolio planning. Once a year, investors need to review their goals to determine if there have been any significant changes. This helps in ensuring whether or not the allocation is still on target to track the investor’s risk-reward profile.
Cultural Transformation: Change within an organization that can be used for shifting the culture of the business towards a desired future state is referred to as cultural transformation. Cultural transformation often involves some sort of organizational restructuring, changes to employee responsibilities and roles, and brand new ways of working. The goal of cultural business transformation is to develop a productive and positive work environment that is aligned to the strategic objectives of the business. Companies undertaking cultural transformation often face problems like difficulty getting everyone on board with the changes. However, successful cultural transformation may lead to a more productive and engaged workforce.
