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Reviewed by Jan 05, 2022| Updated on
Portfolio construction is a process of selecting securities optimally by taking minimum risk to achieve maximum returns. The portfolio consists of various securities such as bonds, stocks, and money market instruments.
To plan for the portfolio investment, you must take an in-depth look at all current assets, investments, and debts if any. Now, you can define your financial goals for the short and long terms. To establish a risk-return profile, you have to decide on the extent of risk and volatility you're willing to take, and what returns you want to generate. Now, the benchmarks can be set in place to track portfolio performance.
With a risk-return profile in place, the next step is to create an asset allocation strategy that is diversified and structured for maximum returns. Now, adjust the plan to consider significant life changes, like buying a home or retiring. The investor has to choose whether to opt active management, which might include professionally-managed mutual funds, or passive management, which might consist of ETFs that track specific indexes.
Once a portfolio is in place, it's crucial to monitor the investment and ideally reevaluate goals annually, making changes as needed.
When the investor is investing for a lifelong goal, the portfolio planning process never stops.With advance in time, there may be changes in the goals. Events such as job change, childbirth, divorce, death, or shrinking time horizons may require adjustments to their portfolio plans. As changes occur, or as market/economic conditions dictate, the portfolio planning process begins afresh.
Portfolio analysis has been the latest trend in the field where investment opportunities are identified, portfolios are aligned with investment objectives, and portfolio risk and performance are monitored. The technology lets investment managers filter information quickly, take advantage of statistical arbitrage opportunities, and deal with inefficiencies, such as transaction costs incurred during trading and tax consequences of investment decisions.
The management of the portfolio begins once the portfolio plan is implemented. Portfolio management is carried out by monitoring the investments and measuring the portfolio's performance relative to the benchmarks. It is essential to report investment performance at regular intervals. The reporting will be done quarterly and the portfolio plan will be reviewed annually.
Once a year, the investor's goals get reviewed because there might be significant changes. The review then determines if the allocation is still on track with the investor's risk-reward profile. If it is not, the investor should rebalance his portfolio. Rebalancing includes selling investments that have reached their goals and buying investments that offer more significant upside potential.