Investment and Portfolio Management PDF

LESSON 1 TYPES OF FINANCIAL MARKETS Types: INVESTMENT - putting your money into something w...

LESSON 1 TYPES OF FINANCIAL MARKETS Types: INVESTMENT - putting your money into something with the Financial markets - backbone of the global economy, allowing 1. Common Stocks - represent ownership in a expectation that it will grow in value or generate income over time. the flow of money and resources to where they are most needed, company and come with voting rights. while also offering opportunities for investors to grow their wealth. - Shareholders may receive dividends, Common Types: stocks, bonds, and real estate - help in price discovery, provide liquidity, and enable risk which are periodic payments made management through various financial instruments. from the company's profits. PORTFOLIO MANAGEMENT - deciding where to put your money Example: Buying shares of Ayala Land Inc. If and how to manage those investments over time. Stock Market - Where shares of publicly traded Ayala Land performs well, you may benefit from GOAL: to balance risk and return to achieve your financial companies are bought and sold. rising share prices and dividends objectives, like saving for retirement, buying a house, or funding a Bond Market - where debt securities (bonds) are issued child’s education. and traded. 2. Preferred Stocks - provide a fixed dividend Money Market - A market for short-term debt and have priority over common stocks in the CONCEPT OF INVESTMENTS: instruments, such as Treasury bills, commercial paper, payment of dividends and the return of capital in - revolves around the allocation of resources, usually and certificates of deposit. the event of liquidation. money, into assets or ventures with the expectation of Derivatives Market - includes financial instruments like - They typically do not come with voting generating income or profit options, futures, and swaps, which derive their value rights. from an underlying asset, such as a stock or a Example: A preferred stock issued by San MAIN OBJECTIVE: commodity. Miguel Corporation, offering a fixed dividend - to grow wealth over time while managing the risks Foreign Exchange (FOREX) Market - where currencies rate and priority over common stockholders in associated with different types of investments are traded. The FOREX market is the largest and most receiving dividends. liquid financial market in the world. IMPORTANCE OF STUDYING INVESTMENTS Commodities Market - where raw or primary products DEBT INSTRUMENTS - represent loans made by empowers you to grow your wealth, achieve your such as gold, oil, and agricultural products are traded. investors to corporations, governments, or other entities. financial goals, manage risks, and make informed - can be traded on spot markets or via futures - The borrower agrees to pay interest and repay decisions that contribute to long-term financial security contracts. the principal amount at a specified maturity and independence date. navigate the complexities of the financial world with FINANCIAL INSTRUMENTS Types: confidence and build a stable and prosperous future. - are contracts that create financial assets for one party 1. Bonds - Long-term debt securities with fixed and financial liabilities or equity instruments for another. interest payments (coupons) and a maturity FINANCIAL MARKETS - They represent a range of assets that can be traded in date. - platforms or systems that facilitate the buying and selling financial markets and are crucial for the functioning of - can be issued by governments or of financial securities, commodities, and other assets. the global economy. corporations. - play a crucial role in the economy by allowing capital to Example: Philippine government bonds, such be allocated efficiently and providing a mechanism for EQUITY INSTRUMENTS - represent ownership in a as Treasury Bonds (T-bonds), offer fixed price discovery. company. interest payments over a set period. - When you purchase equity, you buy a share of COL FINANCIAL for a richer life - NOT a financial market the company, which entitles you to a portion of the company’s profits and assets.  2. Treasury Bills (T-Bills) - Short-term 3. Swaps - two parties exchange cash flows or 2. Repurchase Agreements (REPOS) - government securities with maturities of one other financial instruments. Short-term borrowing arrangements where one year or less. - Common types: interest rate swaps party sells securities to another with an - sold at a discount and mature at face and currency swaps. agreement to repurchase them at a later date. value. Example: An interest rate swap where one party Example: A repo transaction involving Example: A 91-day Treasury Bill issued by the pays a fixed interest rate on a loan while government securities where a bank sells T-bills Philippine government, purchased at a discount receiving a floating rate from the counterparty. to raise immediate funds and agrees to and redeemed at face value upon maturity. repurchase them in a week. HYBRID INSTRUMENTS - combine features of both 3. Certificates of Deposit (CDs) - Time deposits equity and debt instruments. INTRODUCTION TO RISK RETURN issued by banks with a fixed interest rate and - offer a blend of the characteristics of bonds and maturity date. stocks. RISK AND RETURN - are fundamental concepts in investment - low-risk and provide guaranteed Types: and portfolio management. returns. 1. Convertible Bonds - can be converted into a - They form the basis of how investors make decisions Example: A 1-year CD from BDO, offering a predetermined number of shares of the issuing about where to allocate their funds, balancing the fixed interest rate on a lump sum deposit. company. potential for profit against the possibility of loss. Example: A convertible bond issued by Metro DERIVATIVES - financial contracts whose value is Pacific Investments Corporation that can be UNDERSTANDING RETURN derived from the performance of an underlying asset, converted into shares of the company’s stock. such as a stock, bond, commodity, or currency. RETURN - gain or loss generated by an investment over a certain - used for hedging or speculative purposes. 2. Preferred Shares with Convertibility - can be period. Types: converted into common stock, usually at the - typically expressed as a percentage of the initial 1. Options - Contracts that give the holder the holder’s discretion. investment. right, but not the obligation, to buy or sell an Example: Convertible preferred shares issued asset at a specified price before a certain date. by Globe Telecom, which can be converted into COMPONENTS: Example: A stock option that allows an investor common stock of the company. Capital Gains: The increase in the value of an to buy shares of Jollibee at PHP 150 each investment. If you buy a stock at PHP 100 and sell it at within the next three months. MONEY MARKET INSTRUMENTS - short-term debt PHP 150, your capital gain is PHP 50. securities with high liquidity and low risk. 2. Future Contracts - Agreements to buy or sell - used for short-term borrowing and lending. Dividends or Interest: Regular income received from an asset at a predetermined price on a Types: investments, such as dividends from stocks or interest specified future date. 1. Commercial Paper - Short-term unsecured from bonds. - commonly used for commodities and promissory notes issued by companies to raise financial instruments. funds. Total Return: The sum of capital gains and income. For Example: A futures contract for crude oil, where Example: A commercial paper issued by a large example, if you earn PHP 10 in dividends and PHP 50 in you agree to buy or sell oil at a set price in the Philippine corporation like SM Investments to capital gains on a PHP 100 investment, your total return future. finance short-term operational needs. is PHP 60. LESSON 2 ELECTRONIC TRADING - Most modern securities markets have moved towards electronic trading KEY REGULATORY BODIES SECURITIES MARKET platforms, allowing for faster and more efficient - platforms where financial instruments such as stocks, transactions. SECURITIES AND EXCHANGE COMMISSION (SEC) - bonds, and other securities are bought and sold. - For example, the PSE has an electronic trading primary regulatory body overseeing the securities - play a crucial role in the economy by facilitating the flow system where trades are executed markets in the Philippines. of capital from investors to companies and governments, automatically based on matching orders. - enforces laws, ensures compliance, and enabling them to raise funds for various purposes. monitors market activities to protect investors MARKET EFFICIENCY and maintain market integrity. TYPES OF SECURITIES MARKETS - how well prices in the market reflect all available PHILIPPINE STOCK EXCHANGE (PSE) - plays a information. regulatory role by enforcing listing requirements, PRIMARY MARKET - where new securities are issued - In an efficient market, securities prices should always monitoring trading activities, and ensuring that listed and sold for the first time. reflect their true value, meaning that it is difficult to companies adhere to disclosure requirements. - Companies, governments, or other entities raise consistently achieve higher returns without taking on capital by selling securities directly to investors. additional risk REGULATORY MEASURES - The primary market is crucial for businesses looking to expand or undertake new projects. WEAK FORM EFFICIENCY - All past trading information DISCLOSURE REQUIREMENTS is reflected in current prices, meaning technical analysis - Companies must regularly disclose financial SECONDARY MARKET - where securities that have cannot consistently predict future price movements. information, material changes, and other already been issued in the primary market are bought SEMI-STRONG FORM EFFICIENCY - All publicly relevant data to the public. and sold among investors. available information is reflected in current prices, - helps investors make informed decisions. - This market provides liquidity and enables making it difficult for investors to profit from new public investors to buy and sell securities with ease. information. MARKET SURVEILLANCE STRONG FORM EFFICIENCY - All information, both - continuously monitor market activities to detect TRADING & MARKET EFFICIENCY public and private, is reflected in prices. This implies that irregularities, unusual trading patterns, or even insider information cannot provide consistent potential violations. TRADING MECHANISMS advantages. - helps maintain a fair and orderly market. ORDER-DRIVEN MARKETS - buy and sell orders are REGULATORY ENVIRONMENT matched by price, often through a central exchange. LESSON 3 - The PSE operates as an order-driven market, 1. INVESTOR PROTECTION - ensure that investors are where trades are executed based on the best protected from fraudulent practices and have access to RISK - the possibility of losing money or not getting the expected available prices. accurate information. profit from an investment. QUOTE-DRIVEN MARKETS - dealers provide quotes - This builds trust in the market and encourages for buying and selling securities, and trades occur based participation. RETURN - the profit or income you earn from an investment. on these quotes. 2. MARKET INTEGRITY - maintain the fairness and - The OTC market often operates in this manner, integrity of the securities market by preventing THE RISK-RETURN TRADEOFF especially for less liquid securities. manipulation, insider trading, and other unethical FUNDAMENTAL PRINCIPLE practices. - Higher potential returns usually come with higher risks.  - Lower risks often mean lower potential returns. - It shows how much the investment’s returns move relative to the market. COMPUTING % RETURN OR ROI TYPES OF RISK RETURN - the gain or loss made from an investment over a 1. MARKET RISK specific period. - is the risk of losses in investments due to - It measures the performance of an investment and is factors that affect the overall performance of typically expressed as a percentage of the initial amount financial markets. invested. - is the uncertainty about the returns of an investment due to changes in the market as a KEY ASPECTS OF RETURN whole, rather than specific to an individual company or asset. 1. CAPITAL GAINS/RETURN 2. CREDIT RISK - profit or loss made when selling an investment - is the possibility that a borrower, such as a for more or less than the purchase price. company or government, will not be able to - Example: If you buy a stock for PHP 100 and meet their financial obligations, resulting in a later sell it for PHP 150, your capital return is loss for the lender or bondholder. PHP 50. 3. INFLATION RISK 2. INCOME RETURN 5. ANNUALIZED RETURN - the possibility that inflation will rise, causing the - Earnings received from an investment, such as - geometric average annual return of an real value (purchasing power) of your dividends from stocks or interest from bonds. investment over a specific period. investment returns to decline. - Example: If you own a bond that pays PHP - Even if you earn a nominal return on your 1,000 in interest annually, that amount is your investment, high inflation can reduce the actual income return. value of those returns. 3. TOTAL RETURN - sum of capital return and income return. MEASURING RISK - It represents the overall performance of an investment. 1. STANDARD DEVIATION - Example: If you make PHP 50 from selling a - used to quantify the volatility or risk of an stock (capital return) and receive PHP 10 in investment's returns. dividends (income return), your total return is - It reflects how much the returns of an PHP 60. investment deviate from its average (mean) 4. PERCENTAGE RETURN return over a specific period. - expressed as a percentage of the initial 6. REAL RETURN 2. BETA investment amount. - adjusts nominal returns for inflation to reflect the - quantifies the relationship between an - Example: If you invest PHP 1,000 and make a true increase in purchasing power. investment's returns and the returns of a market total return of PHP 100, the percentage return is 7. RISK-ADJUSTED RETURN index (such as the Philippine Stock Exchange 10%. - measures how much return an investment Index or PSEi). Percentage return is the SAME as generates relative to the risk taken. Return on Investment (ROI) - helps investors understand whether an 4. ALPHA - represents the excess return EFFICIENT FRONTIER - represents a curve on investment is yielding a sufficient return for the of an investment relative to its a graph plotting the expected return against the level of risk involved. expected return based on its beta. risk (standard deviation) for various portfolios. - Various metrics are used to assess - measures the investment’s - Portfolios on this curve are considered risk-adjusted returns, each providing different performance relative to the "efficient" because they offer the insights into an investment’s performance. market. highest expected return for a given level of risk. LESSON 4 METRICS FOR RISK ADJUSTED RETURN 1. THE SHARPE RATIO - measures the PORTFOLIO THEORY return per unit of total risk (standard deviation). KEY CONCEPTS - used to determine how well the return compensates for 1. MODERN PORTFOLIO THEORY (MPT) the risk taken. - Developed by Harry Markowitz in the 1950s - a framework for constructing an investment portfolio to maximize returns for a given level of risk or, alternatively, to minimize risk for a given 3. THE CAPITAL MARKET LINE (CML) and SECURITY level of return. MARKET LINE (SML) 2. SORTINO RATIO - similar to the CAPITAL MARKET LINE (CML) - represents Sharpe Ratio but focuses only on KEY PRINCIPLES: the risk-return tradeoff for efficient portfolios that downside risk (negative volatility). Expected Return: The average return an include both risky assets and a risk-free asset - measures the return per unit investor anticipates from an investment over (e.g., government bonds). of downside risk. time. - shows the return expected from Risk (Volatility): The degree of variation in portfolios combining risky assets and a returns, often measured by the standard risk-free asset deviation. - The slope of the CML represents the Diversification: Spreading investments across market price of risk various assets to reduce 3. TREYNOR RATIO - measures return SECURITY MARKET LINE (SML) - Represents per unit of systematic risk (beta). 2. DIVERSIFICATION AND THE EFFICIENT FRONTIER the expected return of individual securities as a - evaluates how well the DIVERSIFICATION - about mixing different function of their beta (systematic risk). investment performs relative types of investments to reduce the overall risk. - a graphical representation of the to the market risk it - By combining assets that don't move Capital Asset Pricing Model (CAPM) assumes. together perfectly, you can reduce the which shows the relationship between portfolio's risk without necessarily risk and expected return for individual sacrificing returns securities. - Beta measures a security’s volatility relative to the market. LESSON 5 Long-term goals in investing - refer to investment strategy, risk tolerance, and asset financial objectives that require a significant allocation. ASSET ALLOCATION - the process of spreading investments period to achieve, typically five years or more. ○ Short-term investment horizon: across different asset classes to balance risk and return according - These goals focus on accumulating Typically less than 3 years. Investors to an investor's goals and risk tolerance. wealth over time, and the investment with short horizons tend to choose strategies are designed to grow assets low-risk investments, like savings IMPORTANCE: steadily, often with a tolerance for accounts or government bonds, to It’s the most important decision in portfolio management, short-term market fluctuations. ensure the funds are available when accounting for over 90% of portfolio returns, and is key to needed. risk management. Common long-term investment goals include: ○ Medium-term investment horizon: 1. Retirement Savings: Building a nest Typically 3 to 5 years. Investors might STRATEGIC ASSET ALLOCATION - a long-term approach egg to support a comfortable lifestyle balance between risk and safety, where investors define a target mix of assets based on their after retiring from work choosing a mix of bonds, mutual long-term goals, risk tolerance, and investment horizon. 2. Buying a Home: Saving for a large funds, or dividend-paying stocks. - emphasizes maintaining a consistent asset allocation down payment or the full cost of ○ Long-term investment horizon: 5 over time, with adjustments made primarily in response purchasing real estate. years or more. Investors with long to significant life events or changes in goals, rather than 3. Education Funding: Investing to pay horizons can afford to take on more short-term market fluctuations. for children’s or grandchildren’s future risk, as they have time to recover from educational expenses. market downturns. Investments might DEFINITION OF TERMS 4. Wealth Accumulation: Growing include stocks, real estate, or overall wealth to achieve financial equity-based mutual funds for potential Risk tolerance – refers to the degree of security or leave a legacy for future higher returns. variability in investment returns that an investor generations. is willing to withstand in their investment 5. Business Ventures: Investing to The investment horizon is important because it portfolio. accumulate enough capital for future helps in aligning risk tolerance with investment - It reflects how comfortable an investor business opportunities. choices. is with the possibility of losing money Longer horizons often allow for riskier, in pursuit of higher returns. Long-term investing often involves higher-risk growth-focused strategies, while shorter assets like stocks, real estate, and mutual horizons require more conservative ○ High Risk Tolerance: Investors are funds, which historically provide higher returns approaches. willing to accept more fluctuations in over extended periods. their portfolio, often choosing higher-risk assets like stocks for the Risk tolerance varies based on factors like age, HOW IS AN INVESTOR’S RISK TOLERANCE DETERMINED? chance of greater rewards. financial goals, and investment time horizon. ○ Low Risk Tolerance: Investors prefer 1. Determining an investor's risk tolerance involves safer investments with less potential An investment horizon - refers to the length of assessing how much risk they are willing and able to for loss, like bonds or fixed-income time an investor expects to hold an investment take on when investing. assets, even if it means lower returns. before needing to access the funds. It plays a crucial role in determining the appropriate 2. Risk tolerance is influenced by a combination of potential higher returns, ○ Income stability and psychological, financial, and situational factors. Here's blending stocks and bonds. expenses. how to evaluate an investor’s risk tolerance: Aggressive: Comfortable ○ Existing assets and with high risk and volatility for liabilities. 1. Risk Tolerance Questionnaire potentially high returns, with a A questionnaire is a common tool used preference for equities or 4. Investment Goals by financial advisors to gauge an alternative investments. Investors’ goals influence how much investor’s risk tolerance. It asks risk they can take. For example: questions related to: 2. Investment Horizon Short-term goals (like Comfort with volatility: How Time horizon - refers to how long an buying a house in a few would they feel if their investor plans to keep their money years) typically call for portfolio dropped by 10%, invested. low-risk investments, such as 20%, or 30% in value in a Generally, longer time horizons allow bonds or cash equivalents. short period? for more risk, as the investor has time Long-term goals (like Investment goals: Are they to recover from potential losses. retirement or children’s saving for retirement, a major For example, a 25-year-old education) can often purchase, or short-term saving for retirement 40 years accommodate more risk, as needs? Longer-term goals away may have a higher risk there is more time to recover usually allow for higher risk. tolerance than a 60-year-old from potential losses. Previous investing nearing retirement, as the experience: Have they younger investor has more 5. Past Behavior During Market Fluctuations experienced market time to recover from market Observing how an investor reacted to downturns before, and how downturns. past **market volatility** can help did they react? assess risk tolerance. Reaction to losses: How 3. Financial Situation Investors who panic and sell during would they respond to losing The investor’s financial capacity to market downturns may have lower risk a significant portion of their handle risk is important. tolerance, while those who hold steady investment in the short term? An investor with significant savings, might be more comfortable with higher low debt, and stable income might risk. Based on the responses, the investor tolerate more risk because they have a is categorized into different risk financial cushion. Conversely, 6. Personal Attitude Toward Risk tolerance levels: someone with little savings or unstable Psychological factors such as fear of Conservative: Prefers stable, income may need to be more loss, need for security, and overall lower-risk investments, such conservative. personality type also play a role. as bonds or fixed-income Factors to consider: Risk-averse individuals may prefer assets. ○ Emergency fund investments that offer safety and Moderate: Accepts some risk adequacy. predictability, while more adventurous and moderate volatility for ○ Debt levels. investors might actively seek high-risk, high-reward opportunities.  stocks grow to 60% of the portfolio, the investor would 7. Age and Life Stage - By considering these factors, investors can align their sell some stocks and reinvest in bonds or real estate to Younger investors tend to have higher portfolios with their risk tolerance to achieve their return to the original allocation. This provides long-term risk tolerance due to a longer time long-term financial goals while maintaining peace of stability and growth without constantly reacting to daily horizon, while older investors often mind. market changes. shift toward conservative investments as they approach retirement. KEY CHARACTERISTICS OF STRATEGIC ASSET TACTICAL ASSET ALLOCATION Life events such as marriage, starting ALLOCATION a family, or nearing retirement may Tactical asset allocation - an active management strategy that lead to changes in risk tolerance over 1. Passive Management Approach: allows temporary deviations from the strategic asset allocation to time. In strategic asset allocation, investors follow a take advantage of short-term market opportunities. passive approach. Tools to Measure Risk Tolerance: This means they don't frequently buy and sell KEY CHARACTERISTICS OF TACTICAL ASSET ALLOCATION Risk tolerance calculators: Available on many based on short-term market changes. Instead, financial websites, these tools guide users they set a target allocation and stick to it over 1. Dynamic Adjustment to Market Conditions: through a series of questions to estimate their the long term, trusting that their mix of assets Tactical asset allocation involves actively risk tolerance. will achieve the desired results. changing the portfolio’s asset allocation based Consulting with a financial advisor: Advisors 2. Rebalancing Periodically: on current market conditions and economic use questionnaires, financial analysis, and As market conditions change, the value of each forecasts. Investors may increase or decrease interviews to create a holistic picture of an asset class in the portfolio can shift. their investments in certain asset classes, such investor’s risk tolerance. Rebalancing involves periodically adjusting the as stocks or bonds, depending on market portfolio back to its original asset allocation. trends, news, or economic indicators. This For example, if stocks perform well and now flexibility allows investors to take advantage of Real-Life Example in the Philippine Setting: make up a larger portion of the portfolio, the short-term opportunities. a. A 35-year-old professional in the Philippines, investor would sell some stocks and buy other 2. Goal is to Improve Returns or Reduce Risks Over the earning a stable income, with minimal debt and assets (like bonds) to maintain the balance. Short Term: long-term goals such as retirement in 30 years, 3. Focused on Stability and Long-Term Growth: The primary aim of tactical asset allocation is to might have a moderate to high risk tolerance. The goal of strategic asset allocation is enhance portfolio performance in the short This investor could accept market volatility in long-term stability and growth. Investors are term. Investors seek to improve returns by favor of higher returns and invest in a mix of less concerned with short-term market swings investing more in assets that are expected to Philippine equities, bonds, and global assets. and more focused on reaching their financial perform well and reducing exposure to assets goals over many years. that may underperform. This strategy focuses b. On the other hand, a 55-year-old nearing minimizes risk by diversifying investments on mitigating risks and capitalizing on market retirement, with a short investment horizon and across different asset classes and sticking to a movements rather than maintaining a fixed the need for income stability, would likely have a disciplined plan. long-term allocation. low risk tolerance. They might focus on Example: conservative investments like government Example: Imagine a Philippine investor who usually allocates 70% bonds, Philippine REITs, or fixed-income A Philippine investor might allocate 50% in local stocks, in stocks and 30% in bonds. If they believe that the stock securities. 30% in bonds, and 20% in real estate. Over time, if market is about to decline due to economic uncertainty,  they might temporarily shift to a 50% allocation in stocks have a higher risk tolerance, as they are looking to bonds, real estate, and cash). This allocation and 50% in bonds to protect their capital. Later, when capitalize on short-term market opportunities. should reflect the client's risk tolerance and they believe the market will recover, they might shift back investment objectives. to their original allocation. This active management aims In practice, many investors use a combination of both ○ Strategic Asset Allocation: A to maximize returns and reduce potential losses in a approaches, known as core-satellite investing, where the core long-term approach that sets target fluctuating market. portfolio follows a strategic allocation while a smaller portion is percentages for various asset classes. tactically managed. ○ Tactical Asset Allocation: A more Strategic VS Tactical Asset Allocation flexible approach that allows for Key Differences: PORTFOLIO CONSTRUCTION short-term adjustments based on 1. Management Style: - involves creating a tailored investment strategy that market conditions. Strategic: Passive, long-term approach. aligns with the client's specific financial goals, risk 5. Select Investments: Tactical: Active, short-term adjustments. tolerance, and time horizon. Choose specific investments within each asset 2. Rebalancing: - This process is a collaborative effort between the class, such as individual stocks, mutual funds, Strategic: Periodically rebalanced to maintain a financial advisor (or portfolio manager) and the client, ETFs, or bonds. Consider factors such as past consistent allocation. focusing on developing a diversified portfolio that seeks performance, fees, and the underlying Tactical: Rebalanced frequently to adapt to to maximize returns while minimizing risk. investment strategy. market opportunities. 6. Diversification: 3. Risk and Return Focus: Key Steps in PORTFOLIO CONSTRUCTION Ensure the portfolio is diversified across Strategic: Focus on long-term stability and 1. Understand Client Goals: different sectors, industries, and geographical matching risk tolerance. Discuss the client's financial objectives (e.g., regions to spread risk. For instance, the Tactical: Focus on optimizing short-term retirement, education, wealth accumulation) and portfolio may include local and international returns by leveraging market movements. specific needs, such as purchasing a home or stocks, various bond types, and alternative 4. Market Influence: funding a child's education. investments. Strategic: Based on long-term expectations 2. Assess Risk Tolerance: 7. Implementation: and investor goals, less influenced by market Evaluate how much risk the client is willing to Execute the investment plan by purchasing the fluctuations. take. This assessment may include discussions selected assets and creating the portfolio. Tactical: Highly influenced by current market about their investment experience, financial 8. Monitoring and Rebalancing: trends and conditions, requiring active situation, and emotional responses to market Regularly review the portfolio's performance monitoring. fluctuations. Risk tolerance questionnaires can and make adjustments as needed. Market be helpful in quantifying this aspect. fluctuations can shift the portfolio's asset Which Approach to Choose? 3. Determine Investment Horizon: allocation away from the desired targets, so Strategic Asset Allocation is better suited for Identify the timeframe for the client’s rebalancing helps maintain the original conservative or long-term investors who prefer stability investments. Long-term goals may allow for a investment strategy. and minimal involvement in daily market fluctuations. It more aggressive portfolio, while short-term 9. Communication: aligns with long-term goals, such as retirement or goals may necessitate a more conservative Maintain open communication with the client to educational savings. approach. keep them informed about market changes, 4. Asset Allocation Strategy: portfolio performance, and any necessary Tactical Asset Allocation is more suitable for investors Decide how to allocate the client's investments adjustments. Regular updates help build trust who are willing to actively manage their portfolios and among different asset classes (e.g., stocks, and ensure the client’s expectations are met.