Investment Portfolio Design, Management, and Performance Disciplines, Rules, and Procedures

Whatever the endeavor, discipline, rules, and procedures can only improve performance.

Consider using the following portfolio management disciplines, rules, and procedures as the starting point for creating your own portfolio management system.

After you have defined each discipline, rule, and procedure within Investor's WorkStation, Investor's WorkStation will let you be creative while it does most of the work for you.

General (all investors, all portfolios, all of the time)

  • Investing Principles and Perspectives -Who you are, what you represent, how you conduct your business; what you need to know, do, have, use, and avoid to invest successfully; what, when, why, how, and what if..
  • Investment Selection Disciplines, Rules, and Procedures; for example, "A Simple Bond Plan".pdf
  • Investment Sectors -User adds to fit investment philosophy and style; such as categorized by broad investment classes such as bonds, equities, mutual funds, money managers, and user defined or by different economic or business investment sectors.
  • Investment Categories -As a subheading to Investment Sectors, user adds to fit investment philosophy and style; such as to categorize by different economic/business sectors or by specific types of bonds, mutual funds, money managers, and user defined investments.
  • Investment Quality - Match to investor's investment risk profile.
  • Investment Database -Potential and recommended investments.
  • Asset Allocation Matrixes -A central investment theme and variations on that investment theme to generate different asset allocations for different types of investors.
  • Asset Allocation -Match investor investment objectives with the appropriate types and numbers of weighted investment sectors and weighted underlying investments.
  • Investment Diversification -Match investor investment comfort zones and time horizons with the appropriate types and numbers of investment sectors and underlying investments by investment categories.
  • Model Portfolios -Suitable, hopefully timely investment sectors and investments by investment categories for different investment strategies.
  • Cash Investment Portfolios -Create unique investment portfolios that match investors with the correct investments.
  • Blended Investment Portfolios -Blend an investor's existing investments with a model portfolio to the extent and when desired to bring new investors under one investment umbrella and to update existing client's portfolios with current investments as opposed to having too many different investment portfolios and to many different investments in different investment portfolios that were intended for the same or outdated objective.
  • Rebalance Portfolios -Reset investment portfolios to original investment sector and investment weightings to maintain the initial structural integrity of investment portfolios.

    • For example, Rebalance Portfolios—two types, 'Basic' and 'Price/Position'— are powerful investment performance tools:



      • Basic portfolio rebalancing maintains the original match between investors' investment profiles (risk and income/capital growth objectives) and asset class/investment sector weightings and underlying investments.
      • Also, as equities do not go straight up or straight down, relative price performance valuations change constantly.
      • Price/Position Rebalancing—resetting investments to their original/previous weightings—helps take advantage of short-term relative price performance discrepancies by distributing/selling portions of investments that are outperforming for the moment and accumulating/buying more of investments that are underperforming for the moment.
        • In effect, Price/Position rebalancing is the continuous process of disciplined 'buying low and selling high' while accumulating investments that are intended to be held for the long term at the best/lowest possible price.
        • Clearly, a change in fundamentals or a price alert(s) set off by an unacceptable variance between current price and cost basis could result in a position(s) being closed.
      • If you like, increase the weighting of an equity that is performing exceptionally well, that is 'going straight up' and offset the increased weighting by reducing the weightings of other same asset class or same investment sector investments before rebalancing to reduce its impact on or eliminate it from the rebalancing process.
      • Many advise annual rebalancing.
        • Need or benefit rather than time is a better way to determine when portfolio rebalancing should be done.
          • Basic: When weightings do not match investors' investment profiles.
        • Price/Position: When there are significant relative short-term investment price variances.
        • Go to Yahoo for example, enter symbol, select chart time period, add related investments @ compare, and view relative investment valuation variances as illustrated above.
  • Reallocate Portfolios -Set investment portfolios to new selections, combinations, and weightings of investment sectors and investments to keep investment portfolios competitive as market conditions change.

    • Redistribute current investment capital to modified and or new numbers, selections, combinations, and weightings, of investment sectors and investments for individual, selected, or global investment portfolios in moments.

    • For example, reduce Large Cap. Equities by 10%, increase Small Cap. Equities by 5%, increase Cash by 5%, sell 50% of IBM and use proceeds to buy MSFT, use 10% cash to buy American Funds (AMCPX); update all affected portfolios, and generate reports; all in less than a minute.

    • The Cost of Buy Hold and Forget

      Holding asset classes/investment sectors/investment categories/investments after a cyclical trend change has occurred has not been profitable for investors in the past.

      Though trends change within asset classes, investment sectors, investment categories, and investments a summary review of broad DJIA cyclical trend changes illustrate the cost of 'buy, hold, and forget.'

      Assuming the 25-year portfolio-building time-frame, an investor aged 50 during the stock market boom that ended with the crash of 1929 waited until 1954 just to break even. In real terms, using the Consumer Price Index (CPI) to measure inflation, that investor did not break even until 1958, at 80 years of age.

      During the immediately preceding bear market cycle in equities that started in 1968, the Dow exhibited significant volatility but nevertheless ended at 985 in 1982; the same level it attained in 1968. Because this was a high-inflation period, it would have taken until 1995 to break even if the Dow’s performance was CPI-adjusted.

      Similar cycles can be seen in other asset classes and markets. After a 20-year bull market, the Japanese NIKKEI Index peaked at 38,900 in 1989. Seventeen years later, it is still 56% below that high.

  • Trading Portfolios -Suitable, hopefully timely equities for different trading strategies.
  • Transaction Management -Accumulate/buy, distribute/sell, dollar cost average, scale.
  • Price Management -Set investment price alerts to build and to protect profit.
  • Price Management Disciplines
    • Alerts:
      • Price
      • Investment Sector Weightings
        • Investment Sector Management -Set investment sector weighting alerts to optimize capital allocation.
  • Replace Investments -Take advantage of change rather than be the victim of change.
    • Deteriorating fundamentals with improving fundamentals, overvalued with undervalued, apparently poorly timed with seemingly better timed, underperforming with outperforming, weak with the strong.

Specific (personal)

  • The Investment Past -Other than in passing, other than a reference point is irrelevant.
  • Protect Capital -Regardless of the market conditions, always be in the investment present, on the investment defensive, and never excuse present portfolio cash value with future value hopes, explanations, and expectations.
  • Primary Investments -Cash, bonds, equities, and real estate - Packaged products are never better than the investment integrity of the underlying investments.
  • Interest Income & Dividends -All portfolios.
  • Trading -Never, unless the client knows at least as much as I do.
  • Alternative Asset Class Investments such as Hedge Funds, Private Equity, and Limited Partnerships - Often have lock-up provisions and other limitations on liquidity, difficult to value/price, no investment so good that it is worth losing liquidity.
  • Liquidity - Must be a daily market, never sacrifice for apparent investment opportunity.
  • Commodities -At no time to speculate, OK to hedge, and never unless the client knows more than I do.
  • Money Managers & Mutual Funds -Second choice. Why have them do what I am supposed to be able to do.
  • Bond Mutual Funds -Never. There is always a better, smarter way.
  • Investment Firms' IPOs -In most cases, if you can get it, you do not want it.
  • Modern Portfolio Theory -Investment diversion amusement.
  • Companies -Quality, products, management, competitive, balance sheet, accounting, earnings, growth, research and development, entry, and use of debt. 
  • Earnings -Realistic, maintainable, accurate, honest, and increasing.
  • Margin* -Never leverage capital to buy more investments unless borrowed capital will be used only as a short-term source for cash needs outside the investment portfolio and where there is a clear and specific source of funds to eliminate margin in the short term.
  • Sell Short* -If Warren Buffett can survive without shorting stocks, so can I; odds are bad going against the upward bias of the market, loss potential infinite.
  • Options* -Never buy, never write covered, and never, ever naked. Well, OK, maybe "buy" every once-in-a-while!

Example: Portfolio Management Disciplines, Rules, and Procedures

Discipline

  • Protect Capital

Rule

  • Price Management: Cut Losses
    • An unrealized loss of ten percent requires a little over a doable 11% gain to break even; however, an unrealized loss of 50% requires a gain of 100% just to break even -a daunting task and an unnecessary, undisciplined, and unpardonable investing performance error.

Procedure

  • Set and Act on Price Alerts.
    • Options depending on investment accumulation status:
      • Average down if more was initially planed for purchase.
      • Distribute large position(s).
      • Sell small position(s) if no more accumulation is planned.

  • Buy Action:
    • Replace investment(s) with weighted investment(s).
    • Reweight existing investment(s) and Reallocate portfolio to reinvest proceeds from sale(s).

Investor's WorkStation Setup

What could be easier, faster, more organized, more complete, more in control, and more important than to:

  • Input user defined Investment Sectors, Investment Categories, and Investment Qualities (many are preinstalled).

  • Define the scope and the boundaries of your investment universes using user defined Allocation Table Matrixes composed of any number, selection, combination, and weighting of timely investment sectors at up to 25 different matrix intercepts for different investor investment risk tolerances and income/capital growth objectives to generate suitable allocations of capital for different investor investment profiles.
  • Add or import investments of any type, bonds, equities, mutual funds, money managers, and user defined, to the Master Database (many are preinstalled).
    Schedule Internet Price Updates.
    Create model portfolio templates as modifiable Advisor Databases composed of weighted investments by investment sectors and investment categories as selected from the Master Database to populate the investment sectors used in a linked Allocation Table Matrix.

    Input or import at Import Portfolios account information and existing positions to Investor Portfolios from a Custodian/BD (Optional).

Investor's WorkStation Process

After the initial setup, Investor's WorkStation will let you be creative while it does most of the work for you:

An Extreme Situation

The following illustration is an extreme portfolio modification situation to demonstrate the capabilities and the administrative and time efficiencies of Investor's WorkStation.

In general, it can be said that if you can think it, Investor's WorkStation can do it.

You have decided that you want your clients to sell 60% of IBM (could be mutual funds, etc.) and use the proceeds to buy MSFT, to sell 100% EK and allocate the proceeds to other investments as weighted in your selected and linked Advisor Database (Model Portfolio Template), to reduce cash in all portfolios by 25% and to allocate that cash to the linked Advisor Database (Model Portfolio), to increase the weighting of Large Cap. Equities in portfolios that use that Investment Sector (classify sectors and categories as you like), to eliminate Utilities altogether in portfolios that hold them (as you feel they are currently overpriced in general and that the sector will underperform others in the future) to add, weight, and apply the appropriate amount of capital to two added Investment Sectors (Mid. Cap. and Small Cap. Equities) and selected, underlying investment as weighted, and, to sell all stocks in Large Cap. Equities that are in the Investment Category titled Computer Peripherals, to change the selections and weightings of some underlying investment In REITs and Large Cap. Equities and finally to Rebalance original investments not affected by this operation back to their initial investment weightings; all in one operation.

You also want all affected portfolios to reflect these changes, to have updated portfolios, to have a report showing buys, sells, and holds by portfolio and a totals for all portfolios, to retrieve a report summarizing and accounting for the % changes by investment sectors for each portfolio, to create a trade export to execute trades, and to import executed trades to update all portfolio positions and costs.

To make the changes:

  • Modify the associated Allocation Table Matrix; this will take about five minutes; max.

  • Modify linked Advisor Database (model portfolio template) used to create the portfolios in question; a minute or two at most.

  • Click on Reallocate; an instant.

  • Export the Trade Export; a millisecond.

  • Print reports; a couple of minutes.

  • Import executed trades to update portfolios; in seconds.

*Investor's WorkStation is intentionally designed not to accept Margin, Short Sales, and Options (other than buys and sells) as these strategies are for most investors, for most of the time the primary causes for major and catastrophic capital losses in the financial markets:

  • In the opinion of mhj3.com, their origins and uses are more to generate additional commissions than they are to add value to an investment strategy or to enhance investment performance.