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6 Key Rules for Effective Portfolio Management

Posted on October 2, 2016 11:00 pm;

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By John Alexander Adam

Managing, and more crucially growing, money is not easy. If it were we would all be a lot richer than we are. Even professionally trained active fund managers at the top of their profession notoriously often fail to beat the market. That can be attributed in large part to fee structures draining profits, but still highlights the scale of the challenge that faces portfolio managers. However, there are many successful investment portfolio managers, private and professional, that do consistently outperform markets. This is especially true when fund managers crippled by their fund’s fee structure are taken out of the equation.

While even the most adept portfolio manager will make the occasional bad call, the real secret to effective portfolio management is in the consistent avoidance of costly errors. In an article for Forbes Magazine, Peter Andersen, Chief Investment Officer at Congress Wealth Management, posits that cutting mistakes down to the bare minimum is what separates consistently successful portfolio managers from the rest. He argues that most mistakes can also be traced back to violations of several key money management rules. So let’s take a look at some of those key rules for successful portfolio management. Some are those mentioned by Andersen and some are not. While this is by no means a comprehensive list, hopefully they will get you thinking about the important things to keep in mind when it comes to minimizing the mistakes that can be the difference between effective portfolio management and disappointed clients, or even a disappointing performance for your own personal investment portfolio.

  1. Patience

Although it can be worded in different ways, from ‘trust the fundamentals’ to ‘long term investing’ ‘patience’ is, with justification, the most commonly cited piece of advice when it comes to a successful investment strategy.

Especially in the news-hungry modern world which continuously updates us on our holdings, it is important to block out all but the most important information and focus on the underlying, longer term fundamentals that original decisions were based on. Markets have more and less volatile periods and while it is crucial to stay alert for significant changes which could impact your holdings, it is just as crucial to cancel out most of the noise and ignore short term volatility.

  1. The Trend Isn’t Always Your Friend

Groupthink may be harder to spot in investment trends than it is at the golf club or between a group of friends but make no mistake, it permeates financial markets to a frightening extent. As a portfolio manager one of the most fundamental pieces of advice you should heed is to ignore what the markets and media are saying and always think for yourself. If you are a day or short-term trader the trend may well be your friend, but as a portfolio manager it is more like peer pressure to skip school. You might gain short-term kudos but it isn’t going to do anything positive for your long term prospects.

  1. Always Have a Pre-Nup and a Plan B

We have already mentioned that it is important to commit to portfolio holdings, to remember your original reasoning, not to follow the crowd and not to be distracted by short-term volatility. However, that doesn’t mean you should both blindly sail into the storm and then stay with a sinking ship when things don’t pan out in the way you initially expected.

When you choose to invest in any holding, go through all of the potential scenarios, positive and negative, that could significantly impact your initial suppositions. You will then know if conditions have changed in a pre-empted way to mean your commitment is no longer be tenable, know the terms of divorce and be able to react. And of course, you need to have Plans B and C in place so you are not scrabbling around trying to figure out what to do when negative scenarios do come to pass.

  1. Know Your Strengths and Fortify Against Your Weaknesses

If you have expert or in-depth knowledge in a particular industry or sphere, use that. Andersen cites the example of an investment manager with particular knowledge of adolescent epilepsy, new medications and potentially break-through treatments and how that had come in useful when it came to certain stock picks. If you are a portfolio manager with a better track record in value-based picks rather than growth picks, focus on what you are good at and bring in someone with complementary strengths, either in an official capacity or as an advisor.

  1. Embrace Technology

There is a wealth of new technology out there that can help portfolio managers hugely when it comes to screening different equities and other assets. They take a lot of the manual process out of value assessment by different metrics and while they are restricted to data-based filtering can be an invaluable tool to flag options for further attention. Embracing these kind of screening tools, and other technology out there, can help portfolio managers make picks from a much vaster range of options than was previously possible.

  1. Communicate

Finally, with the best of intentions, impeccable approach, knowledge and skill, professional portfolio management requires communication if the manager is to be successful. When a fund underperforms the market investors are twice as disappointed as they are happy when it outperforms. The same is true of a portfolio manager’s clients. There will always be times when a portfolio loses value, it is unavoidable. However, clear communication with clients on the decision making process, correct expectation setting and regular updates will reduce the chances of clients panicking when that does happen. Don’t try to make your skill set seem mysterious and out-of-reach. Educate your clients as much as possible on investment principles and your approach. The better they understand what you are doing the less likely they are to be phased by setbacks and appreciate successes.

If you would like to improve your understanding of business and finance, why not take a qualification such as the CFA® Program. Morgan International offers a number of different professional finance, investment and business-related qualification programs at locations across the Middle East.


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