Step-by-step portfolio planning process

There is nothing more important and daunting than formulating a long-term investment strategy that allows individuals to invest with confidence and clarity in their future. Building a portfolio requires a well-thought-out and precise portfolio planning process, which follows five basic steps.

Key points

  • In order to plan for the future, first look at the present calmly and carefully, and screen all current assets, investments and any debts; then, determine your short-term and long-term financial goals.
  • Find out how much risk and volatility you are willing to take, and what returns you want to generate; after establishing a risk-return profile, you can set benchmarks to track the performance of your portfolio.
  • After the risk and return allocation is in place, the next step is to create a diversified and structured asset allocation strategy to achieve maximum returns; adjust the strategy to cope with major life changes, such as buying a house or retirement.
  • Choose whether you need active management (which may include professionally managed mutual funds) or passive management (which may include ETFs that track specific indexes).
  • Once the portfolio is in place, it is important to monitor the investment and ideally re-evaluate the target annually, making changes as needed.

Step 1: Assess the current situation

Planning for the future requires a clear understanding of the current situation of investors and the goals they want to achieve. This requires a thorough assessment of current assets, liabilities, cash flow, and investments based on the investor’s most important goals. Goals need to be clearly defined and quantified so that the assessment can determine any gaps between the current investment strategy and the established goals. This step needs to include a frank discussion of the investor’s values, beliefs, and priorities, all of which lay the foundation for formulating investment strategies.

Portfolio planning is not a once-and-for-all transaction-it requires constant evaluation and adjustment as you go through different stages of your life.

Step 2: Establish investment goals

The core of establishing investment goals is to determine the investor’s risk-return status. Determining how much risk an investor is willing and able to bear, and how much volatility the investor can withstand, is the key to formulating a portfolio strategy that can provide the desired return at an acceptable level of risk. Once an acceptable risk-return profile is established, benchmarks can be established to track the performance of the portfolio. Tracking the performance of the portfolio against benchmarks allows for minor adjustments in the process.

Step 3: Determine asset allocation

Using the risk-return profile, investors can formulate asset allocation strategies. Investors can choose from a variety of asset classes and investment options to allocate assets in the best diversified manner while aiming for expected returns. Investors can also allocate percentages to various asset classes, including stocks, bonds, cash, and alternative investments, based on the acceptable fluctuation range of the investment portfolio. Asset allocation strategies are based on a snapshot of investors’ current conditions and goals, and are usually adjusted with changes in life. For example, the closer investors get to their retirement target date, the greater the change in distribution to reflect the lower tolerance for volatility and risk.

Over the years, your risk-reward profile will change, and the closer you are to retirement, the farther away you are from risk.

Step 4: Choose investment options

Choose personal investment according to the parameters of the asset allocation strategy. The specific investment type chosen depends to a large extent on the investor’s preference for active or passive management. If there are sufficient assets to achieve optimal diversification, the actively managed portfolio may include individual stocks and bonds, with assets usually exceeding $1 million. Smaller investment portfolios can be appropriately diversified through professionally managed funds, such as mutual funds or exchange-traded funds. Investors can use index funds selected from various asset classes and economic sectors to build passively managed investment portfolios.

Step 5: Monitor, measure and rebalance

After implementing the portfolio plan, the management process begins. This includes monitoring investments and measuring the performance of the portfolio relative to benchmarks. It is necessary to report investment performance on a regular basis (usually quarterly) and review the investment portfolio plan annually. Once a year, the investor’s situation and goals are reviewed to determine if there are any major changes. Then the portfolio review determines whether the allocation still meets the target, in order to track the investor’s risk-reward status. If not, you can rebalance the portfolio, sell investments that have reached the target, and buy investments with greater upside potential.

When investing for lifetime goals, the portfolio planning process never stops. As investors go through various stages of life, changes may occur, such as job changes, birth, divorce, death, or shortening the time frame, which may require adjustments to their goals, risk-reward status, or asset allocation. As changes occur, or as required by market or economic conditions, the portfolio planning process will restart, following each of the five steps to ensure that the correct investment strategy is in place.


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