Professor Nabil’s advice, lesson 5: The principles of portfolio management

Hi everyone! Today I want to talk to you about managing your portfolio. I don’t mean a collection of photographs, artwork or documents for potential employers. I’m talking about your portfolio of investments in financial markets – and the rules you (or your professional financial adviser) should follow to make it grow. Pencils ready, because class is in session!

Let’s start with the basics

Before we get going, let’s clarify what we’re talking about here. Portfolio management is the art of putting together a portfolio of financial assets, and of developing it so that it brings in the amount of return you want, which you decide in advance. You do this by following investment objectives, while respecting your risk tolerance, financial situation and personal knowledge and experience with investment. In short, it’s a way of investing your capital for the future. If you don’t have the time, energy or knowledge needed to dive into the markets on your own, you can get assistance from a professional portfolio manager. This person will help you decide what to do (if you use an advisory service), or even do all the work for you (with a discretionary management service). But ultimately, you control the objectives and strategies your investment adviser can use, by creating your own investor profile.

Sign on the dotted line

Portfolio management (unadvised, advised or at the full discretion of the manager) is always governed by a contract. Your financial intermediary is legally required to create this contract if they want to offer you assistance and services.

It’s definitely not as simple as getting some good advice from your old friend Nabil, or reading up on day-to-day money management on a platform like myLIFE.

Choose the right option

There are three basic types of portfolio management:

• “Execution only”, where your Relationship Manager does nothing but perform the stock market transactions you tell them to, and give purely descriptive information about financial products or how to use the client interface. You and you alone decide how to invest your capital.
• Discretionary (or delegated) management, where you entrust all the assets you wish to invest to your portfolio manager, who will then make investment choices without having to consult you first. Of course, they’ll still follow the objectives you set together in advance.
• Advisory management, a solution in between the first two, where your investment adviser proactively offers advice and recommendations that suit your investor profile – but in the end, you still call the shots.

Define your investor profile

As you can plainly see, no matter which type of portfolio management you choose, it’s critical that you define your investor profile. This means deciding what your investment objectives are and how much risk you can take on, as well as assessing your financial situation and how familiar you are with the different financial instruments available to you.

Your Relationship Manager will help you do this by asking you a series of standard questions, gathering all your information, and then showing you the end result. Make sure you answer thoroughly and truthfully! The clearer you are, the more accurate your profile will be, and the easier it will be for the portfolio manager or investment adviser to give you the best possible assistance.

There is generally a starting phase in which you and your portfolio manager will develop the habits that will make up your particular style of communication.

Communication is key

Think of your portfolio manager or investment adviser as a partner. As with any partnership, good communication is crucial, especially at the beginning (as we have just seen). When entering into an advisory agreement, there is generally a starting phase in which you and your portfolio manager will develop the habits that will make up your particular style of communication. That means it could take some time to get to know one another, so be patient.

You should also make sure that your investment adviser is able to contact you. Clear up any grey areas by asking them anything you find yourself wondering, and when they have a question for you, answer it as soon as you can. Responsiveness is a necessity in this field.

A relationship with a portfolio manager or adviser must be built on trust. As the expert, your Relationship Manager knows the markets well, and has the knowledge you need to achieve your goals. Give them what they need to do their job – it’s why you hired them, after all.

Humility is a virtue

Markets can be volatile, so check your ambition. You would do well to remember certain tried-and-tested investment “commandments”, and never lose sight of the fact that investing isn’t an exact science. Strategies that have worked for a long time can stop paying off from one day to the next. To quote the disclaimer accompanying any new investment, “Past performance is no guarantee of future performance”.

In addition to volatility, human emotion is a factor well worth considering. If you let your emotions cloud your reason, it can lead to unwise choices. Learn to temper your enthusiasm and brush your disappointments off. Neither one can offer sound advice.

You shouldn’t expect your manager or investment adviser to work miracles, but do know that you can count on their experience and ability to make rational decisions amid the turbulence that all investors must weather from time to time.

Also remember that portfolio managers and investment advisers aren’t magicians. Being an expert in financial markets doesn’t mean you can predict the future. You shouldn’t expect your manager or investment adviser to work miracles, but do know that you can count on their experience and ability to make rational decisions amid the turbulence that all investors must weather from time to time.

Think long term

This is advice I often give when talking about investment, and it applies here too: try to keep a long-term perspective. Sometimes shrewd manoeuvring can pay off, but overall, I strongly recommend having a long-term strategy instead. This will also give you space to temper the emotions we mentioned earlier.

Diversify, diversify, diversify

This is a principle your portfolio manager or adviser will most certainly apply. When it comes to investment, diversification is always on the agenda. Diversify your asset classes, diversify their geographical regions and diversify the types of returns they yield. There’s no doubt that diversifying your risk exposure is the best way to keep yourself out of a tight spot, and to be able to recover from losses.

Now you know some golden rules that you can turn to when managing your portfolio. Never forget that investing isn’t a game, even when you feel like you’re winning! With that, class is dismissed. Until next time!