Introduction, objectives and constraints

This unit bridges the gap between individual security selection and the overarching strategy of wealth management. Portfolio management focuses on the ongoing creation and maintenance of optimal asset groupings. Estate planning deals with protecting wealth and passing it on, in a manner that is efficient and in accordance with one's wishes.

Portfolio Management for Individuals

• Definition: The process of continuously selecting, organizing, and strategically managing a collection of investments (a portfolio) to achieve specific financial goals, taking into account an individual's risk tolerance and constraints. It's dynamic, not a one-time activity.

Objectives of Portfolio Management

• Capital Growth:

  • Explanation: The objective is to increase wealth over time through the appreciation of asset values. Emphasis is placed on investments with the potential for capital appreciation, which can be a mixture of speculative and secure instruments depending on the risk profile.
  • Examples: Growth stocks, real estate, and other assets with potential for significant price appreciation.

• Income Generation:

  • Explanation: To generate a steady stream of income from the portfolio through dividends, interest, or rental income.
  • Examples: Bonds, dividend-paying stocks, real estate properties.

• Risk Reduction:

  • Explanation: To minimize potential losses by diversifying investments across different asset classes, industries, and geographic regions.
  • Importance: Essential for protecting capital and achieving consistent returns.

• Liquidity:

  • Explanation: Ensuring that sufficient funds are readily available to meet current financial needs and emergencies.
  • Examples: Money market accounts, short-term bonds, and other liquid assets.
  • Importance: Provides flexibility and peace of mind.

• Tax Efficiency:

  • Explanation: Structuring investments to minimize tax liabilities and maximize after-tax returns.
  • Examples: Utilizing tax-advantaged accounts, investing in tax-efficient assets, and employing tax-loss harvesting strategies.
    • See the book’s prior sections for a description of some ways to accomplish this

Constraints in Portfolio Management

• Time Horizon:

  • Explanation: The length of time the investor has to achieve their financial goals.
  • Impact: Affects the risk tolerance and investment strategies that are appropriate. Short-term goals require more conservative investments, while long-term goals allow for greater risk and growth potential.

• Current Wealth:

  • Explanation: The amount of capital available for investment.
  • Impact: Directly determines the investment capacity and the ability to diversify.

• Tax Considerations:

  • Explanation: The investor's tax bracket, capital gains tax rates, dividend tax rates, and available exemptions.
  • Impact: Investment strategies should be structured to minimize the tax burden and maximize after-tax returns.

• Liquidity Requirements:

  • Explanation: The need for readily available cash to meet current expenses, emergencies, or other obligations.
  • Impact: Influences the allocation of funds to liquid assets versus less liquid investments.

• Anticipated Inflation:

  • Explanation: The expected rate of inflation over the investment period.
  • Impact: Affects the required return needed to maintain the purchasing power of investments.