cfp chapter 14chapter 14 managing investment portfolios the

1、1. Understand the Clients GoalslNeed to be as clear and precise as possiblelMay have multiple goals & each goal may need to be defined2. Identify a Target Rate of Return lIrreconcilable differencesModify goalsSave moreTake more riskDelay timing of goalsLower withdrawal rate during retirement3. A

2、gree on a Time HorizonlSome goals have specific horizonsSaving for collegeDate of retirementlOther goals may be vagueLifespan after retirement4. Understand Clients Tolerance for and Capacity for RisklRisk tolerance questionnaireNo formulaic answer, but shows due diligenceScore is a guideline to asse

3、t allocationlFor some, capacity exceeds tolerancelFor others, tolerance exceeds capacity5. Identify Asset Classes and Investment VehicleslNumber of classes varies with portfolio sizelInvestment vehiclesCan be specifically named securitiesCan be broader such as ETFs or index funds6. Design the Asset

4、AllocationlSpreadsheetPercentage weights by categoryExpected rate of returnProjected standard deviation of returnlStrategic Asset AllocationStrategic Asset AllocationSet at highest level, Rarely changedBroad categories, Broad percentage rangesUsed to determine portfolios overall level of risk7. Writ

5、e the Investment Policy Statement (IPS)l6 components:Key Factual/account informationObjectives, time horizon, and risk attitudesPermissible asset classes, constraints, and restrictions.The asset allocationSelection, monitoring, and control proceduresSignatures8. Select the Investments lIf assets ass

6、igned to managers, follow the asset class & investment vehicle ruleslIf managed by planner, must be agreement as to criteria to be usedlTactical Asset AllocationMay be made for the purpose of “beating the market,” rather than setting desired level of risk exposure, or to fine-tune risk-exposureM

7、ay include many more asset categories9. Monitoring, Managing, ReportinglPortfolio performance evaluation techniques discussed in courselBenchmarkslMonitoring & reporting should at times lead back to Step 1Clients situations change (age, family, attitude toward & capacity for risk)MPT: Portfo

8、lio Size and Total Risk (continued)Impact of Portfolio CompositionlA portfolio of only mutual fundsMore funds appropriate if no-load than if loadlFor direct stock holdings:Fewer stocks needed if highly ratedFewer stocks if low beta holdingsFewer if restrained by industryFewer if include internationa

9、l diversificationMore if highly concentrated (sector?)Figure 14-4Portfolio RebalancinglKey issues:How to define rangesWhen to rebalance How to rebalancelRanges:Range should depend on allocation percentage10% +/- 5% vs. 10% +/1%Rebalancing StrategieslOptimal strategy depends on whether commissions ar

10、e % or fixed dollar amountlIf %, then rebalance to edge of range as soon as go over out of desired rangelIf fixed dollar amount, then Set two ranges: optimal (outer) range & rebalance (inner) rangeRebalance to edge of inner rangeOther Investment IssueslInvestment research EffortlMinimum Investme

11、nt SizelEthical & Moral AppeallReconciliation of optimal asset allocation with optimal tax efficient allocationlConcentrated portfoliosSolutions to Concentrated HoldingslEasy solutionsIn a qualified accountBelow costlTough solutionsPay capital gains tax while it is still “cheap”Set up a hedge su

12、ch as a “collar”write call options, strike prices above stock priceuse proceeds to buy put options below stock priceSolutions to Concentrated HoldingslMore tough solutionsGive some or all of holdings awayCharitable Remainder Trust or Lead TrustGive to family membersPasses on CG taxes, but moves out

13、of estateGive to someone who offers to “will” it back & lives for at least one yearProvides step-up in cost basis to market valueDollar Cost AveragingDollar Cost AveraginglFormula investment plan requiring periodic (such as monthly) fixed-dollar-amount investmentslPassive form of market timing b

14、ecause more stock is purchased when price is low than when high.(continued)Dollar Cost AveragingDollar Cost AveraginglMost people do it as only way to access cash for investmentlNot as effective as investing full amount at one time, if it is availableLower expected return, but lower riskBetter than

15、plunking only in highly volatile periodslGood tool to overcome fear of investingDividend Reinvestment PlanDividend Reinvestment PlanlCompany program that allows dividends to be reinvested in additional shareslMay be sold at a discount from current market pricelCan lead to a concentrated portfolioDir

16、ect Purchase PlanDirect Purchase PlanlSpecified amount of money is automatically applied toward purchase of companys stock at specified intervals (such as once a month)lForm of dollar cost averaginglCan lead to concentrated portfolio if dont change selectionsEmployee Stock Purchase PlansEmployee Sto

17、ck Purchase PlanslDefined in IRC Sec. 423 lAllows company to sell stock to employees at discount from fair market price lOption to buy stock must be offered to employees on nondiscriminatory basis to receive special tax treatment(continued) Employee Stock Purchase PlansEmployee Stock Purchase Plansl

18、Offer price can be as low as 85 percent of fair market value on either offer/grant date or on sale date, whichever is less lBenefit to employee:Can acquire stock at below market prices“Forced” savings planlDrawback:Can lead to concentrated portfolioBehavioral Factors Affecting OutcomeslBehavioral Fi

19、nanceMPT built on the “economic man”In truth, people have built in irrationalities that affect decision makingBehavioral Factors Affecting Outcomes lPatterns and PredictionsPeople seek to see patternsEveryone uncomfortable with idea that events are randomFirst assumption is always to extrapolate, ev

20、en when unrealisticHindsight biasMost people, after an event, believe they would have predicted the result if they had needed toBehavioral Factors Affecting OutcomeslOverly Optimistic IndividualsInvestors become more confident toward the end of a bull market (esp. men)More experienced investors tend

21、 to hold more concentrated portfoliosBehavioral Factors Affecting OutcomeslLaw of “Small” NumbersPeople willing to extrapolate based on a small number of observationsMany willing to base expected rates of return on last two or three yearsFraming the PlanlFraming is the manner in which an issue is pr

22、esentedWhen presented with alternative asset allocations, most people choose the one in the “middle”Gains & losses measured relative to the size of the investment (a $20 loss on a $100 investment is more painful than a $1,000 loss on a $10,000 investment!)Framing the Planl“1/N” approach to security selectionlMental AccountingPeop