How to manage the portfolio? The 3 stages of portfolio management

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Alexander Elder

As we discussed in our With small steps to big incomes and The Dos and Don'ts of Investing blogs, defining an investment strategy is an important step before investing. Today we will talk about what steps we distinguish during portfolio management, what types of investment strategies we distinguish and we will understand which of them is more appropriate to apply in accordance with our investment goals and expectations.

The whole portfolio management process can be divided into 3 main stages.

• Planning

At this stage, first of all, you need to understand risk tendency, investment expectations, expectations on profitability, time horizon, liquidity requirement and other specific requirements related to the management and expected results of the given portfolio.

It is preferable not only to clearly define all these requirements, but also to have them in writing, because their consistent observance and not registering significant deviations from the strategy as a result of situational decisions are the prerequisites for effective portfolio management and the realization of predefined expectations.

After setting the expectations, we also specify a benchmark against which we will be able to further evaluate the performance of the portfolio. When choosing it, it should be taken into account that its characteristics are as close as possible to the portfolio we have built։ for example, if we are investing in the stocks of companies in the technology sector, we can choose an index or ETF of that sector as a benchmark.

• Estimation and implementation

If in the previous stage we defined our expectations and standards in general, then this stage is their implementation, the analysis of specific assets and their characteristics and the estimation of compliance with the standards we set. If we had specified in our preference list that the portfolio would include stocks of companies in the technology sector, then here we single out such companies and evaluate them separately whether they are as profitable as we expect, what are the risks associated with them, whether the level of risk corresponds to our acceptable level, etc.

A top-down approach is often applicable. in this case, we start the analysis from macroeconomic indicators and forecasts, such as GDP growth, the expected level of inflation and market interest rates, so that we can evaluate the group of assets that will be more appropriate for us. When the groups have already been selected, we proceed to the selection of specific securities from them.

• Analysis of results

One of the last and most important stages. Here we already evaluate the performance of our portfolio, do the management results meet our pre-defined expectations? As a result of the change of time and circumstances, our anticipations, expectations and investment restrictions may change and it is at this stage that we change, update and redefine them.

Now that we have familiarized ourselves with the stages of portfolio management, let's discuss the 2 main approaches to investment strategy: active and passive.

In active management, the portfolio manager monitors the market and makes regular adjustments and updates to outperform a market benchmark, such as an index. This requires a long time and professional knowledge, constant awareness of the market movement, therefore it is more resource intensive than the next passive management.

In this case, unlike active management, constant involvement is not required, but investments are made mainly in the market index or a certain segment index. Thus, we can choose an ETF of a segment with growth potential. In this case, the evaluation, selection, change of specific organizations is carried out by the manager of the given fund or, in the case of index investments, by the company that compiles the given index. These investments are less expensive, but it should be taken into account that the potential profitability may be lower than the result of active management.

If you have already decided what your preferred strategy is, then congratulations, you have taken the first important step on the way to forming and managing your portfolio. All you have to do is follow these simple steps:

• Open a brokerage account
• Download the EvocaINVEST app
• Multiply your earnings with Evocabank

For questions related to investments in securities, you can contact the Investment Operations Department:

• +374-10-20-55-55
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