Archive for the 'Portfolio Management' category

Tips for Diversifying Your Portfolio

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Tips for Diversifying Your Portfolio Diversification of the assets in the portfolio is widely used tool used by financial planners, fund managers and individual investors. The markets are usually very dynamic and it is impossible to predict the exact movement of the indexes. In such conditions, diversified portfolio plays an important role in minimizing the risks and maximizing the profits.

Investors should practise disciplined investing along with a diversified portfolio. The diversification of portfolio is a prerequisite to receive good returns from the market in the long run. Due to fluctuations in the market, investors may lose about 80% in the market before reacting to the situation. Thus, Investors can rely on the diversification as a suitable offense for best defence. Generally, a well-diversified portfolio along with an investment horizon for a time period of three to five years can survive major upheavals in the markets.

Investing can be rewarding, informative and educational; if one follows the below mentioned steps.

· Disciplined approach

· Using diversification

· Buy-and-hold

· Dollar-cost-averaging strategies

Spreading out the investments

Investors should invest in the equities as they provide great returns, however it is strictly advised to not put all of your money in the investments of one stock or specified sector. It is recommended that investor should create his/her own virtual mutual fund by making investments in few companies that are doing well and trustworthy. It is good to make the investments in the companies you know well or whose goods and services you use. It is a good way of making healthy approach to one sector.

Invest in Index or Bond Funds

As an investor you should consider adding fixed-income funds or index funds to your portfolio. One of the excellent ways for long-term diversification investment is to invest in securities that track various indexes. Another way of further hedging your portfolio against market uncertainties is to add some fixed-income solutions.

Continue Building your portfolio

It is important to keep adding investments on a standard regular basis and grow your portfolio. One should avoid investing the Lump-sum amount in volatile or uncertain market conditions. This strategy of investing helps in smoothing out the peaks and valleys produced by volatile market conditions. Thus, as an investor, one should invest money regularly into a specified portfolio of funds/stocks.

Aware of the time to Exit

It is mandatory for a smart investor to know when to exit the market. Some of the sound strategies of managing portfolios are dollar-cost averaging, purchasing, and holding. One should not ignore the fact that time to exit the market is very crucial for remaining in tune with market conditions and staying current with the market investments. One should know the current happenings in the companies you have invested in.

Be alert regarding your commissions

In case, you are not a trader, you should comprehend what you are receiving by paying fees to the firms for managing your portfolio. There are some firms that charges monthly fees while others charge transactional fees. One should be aware of the payments you are making and returns you are receiving.

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Project Portfolio Management (PPM)

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A Project Portfolio Management (PPM) refers to set of procedure or methods used for analyzing and collectively managing a group of projects (current or proposed) depending on the various key characteristics. It is widely used by project managers and project management organizations.

The basic objective of Project Portfolio Management is the determination of the optimal mix and proper sequencing of proposed projects in order to achieve the overall goals of organization.

It takes into account various factors such as business strategy goals, hard economic measures or technical strategy goals.

Project Portfolio Management (PPM) The project portfolio management involves the analysis of various attributes of projects as mentioned below.

· Project’s total expected cost

· Consumption of scarce resources

· Expected timeline

· Schedule of investment

· Expected nature

· Magnitude of benefits

· Timing of benefits to be realized

· Relationship or inter-dependencies with other projects

There are various vendors of PPM software that highlight ability of their products to treat projects as part of entire investment portfolio. PPM focuses on management of project portfolio as an informal approach for project investment decision making.

There are various PPM tools that enable companies in managing the continuous flow of projects from beginning of concept to its completion. There are many PPM tools and methods that provide techniques and technologies for allowing improvement, visibility, measurement and standardization of process.

Decision Trees

One of the popular PPM tools is decision trees with decision nodes that allow multiple options and enable the project managers to optimize project against a constraint.

Decision centric view

A decision centric view is an approach for including uncertainty and risk in portfolio optimization. There are five key decisions that are made while taking decision centric view of the project portfolio optimization process.

· Decision D1: It includes making decisions about strategic initiatives, benefits, and resource limitation criteria that are used for portfolio ranking and project filtering.

· Decision D2: It includes making decisions about criteria that are important to achieve.

· Decision D3: It includes making decisions regarding the project ideas that can be developed into business cases.

· Decision D4: It includes making decisions about the Business Cases that should be considered as element of the portfolio.

· Decision D5: It includes making decisions about the projects that should be funded.

Resource allocation

Resource allocation makes up a significant constituent of PPM. The available resources of a company is evaluated for its capability to fulfil the demands of project once it is determined that project or projects meet defined objectives. The resource allocation can be done effectively by funding resource commitments, funding the skills available in the resource pool and understanding of existing labour. The project investment must be made in projects where the required resources are available during a particular time period.

Pipeline Management

Pipeline Management involves the determination of various ways for executing a set of projects

in the portfolio in a specified time; given there are only finite development resources in the organisation. The pipeline management relies on the ability of the project managers to measure the planned allocation of development resources as per the strategic plan.

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PPM Studio

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PPM Studio is a Project Portfolio Management software program that ensures that every project investment is aligned with the business objectives of the organization. It helps in prioritizing, monitoring and delivering the likely business values.

Benefits of PPM Studio

Competitive evaluation of projects investments

PPM Studio enables the portfolio managers to evaluate the competitive project investments by implementing the PPM Studio Project Governance Framework. Project Portfolio Manager assist the companies in setting up this project governance framework that ensures that any project investment shall be comprehensively analysed in terms of capacity available , business objectives , risks involved, budget required, Return On Investment(ROI), etc. It also allows the PM Managers to rank the portfolio investments among all the competing investments. This exercise is performed for ensuring that vital projects should be accepted and executed.

Enables Real-time visibility across the PortfolioPPM Studio

PM Studio enables the real-time visibility of the projects across the Portfolio. The Key Performance Indicators (KPI) are used for analysing the real time portfolio health for taking corrective and informed decisions on time. It also allows keeping the projects in the portfolio on track to meet the defined objectives.

Enhancing the utilization of resources by using ERP

PPM Studio allows the portfolio managers to use Enterprise Resource Planning tools for enhancing the utilization of resources. It offers clear visibility of resource allocation and its utilization through the projects and business units. The optimal utilization of resource capability is ensured by the skill based resource allocation.

Pipeline Management

PPM Studio Portfolio Manager helps in the determination of ways for executing the projects in the portfolio in a specified time. As there are many projects in the portfolio and limited resources are available for their implementation. Therefore it is important to have a proper pipeline management of the projects in place to ensure that only the best and worthy projects are selected and executed.

PPM Studio enables the portfolio managers in maintaining the projects pipeline for measuring the planned resource allocation and utilization as per the defined strategic plan. The projects execution can be done on the basis of strategic value, business benefits and criticality.

Best Practices

PPM Studio offers the best practices for efficient managements of projects in the portfolio. It enables the portfolio managers to select, execute, monitor and delivery the projects on time. PPM Studio complies with numerous project management methodologies that are widely followed across the world. The portfolio managers can also configure workflows that are specific to the organization.

Efficient Project Portfolio Management

· Allows the portfolio management to organise the projects in groups and leveraging appropriate staff for building a efficient project team

· Leads to the completion on projects on time and there are no project delays due to lack of enough resources

· Effective utilisation of the key project contributors so that they are available on time for executing the projects

· Project status remain stable for longer duration

· Cooperation between various departments and sub-organizations for achieving the portfolio goals by using available resources

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Portfolio Management in Tough Economic Times

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Portfolio Management in Tough Economic Times The implementing of the effective portfolio management is very challenging in the difficult economic conditions. The market volatility and uncertainty exerts pressure on the portfolio managers and investors to minimize the risks and still generate good returns or maintain their investments if not growing them.

Facing the challenges

Portfolio Managers should be prepared to deal with tough market conditions so that they can spend money on and resources on their vital investments. As per the experts and analysts, the economy magnifies the impact of challenges rather than creating any new challenges.

Some of the vital challenges faced by Portfolio Managers are as follows

· Deciding to take an initiative before it’s scoped out.

· Ensuring that right resources are used on most important securities

· Managing the portfolios outside their politics

· Modifying the existing projects and investments in efficient manner so as to maintain the portfolio returns in difficult market conditions

Fewer Funds available for investments in portfolio

The difficult economic conditions usually left the investors with fewer dollars available for maintaining or growing their portfolios. There are many portfolio managers or investors that cut down on their investing for new assets or securities. The costs of maintaining and managing the portfolio increase with the number of securities or assets. The portfolio managers focus on finding ways for sharing the resources between various stocks.

Assessing the Applications and Systems

The portfolio managers can also assess the applications and systems to cut down the costs and evaluate their worth to the company. The PM’s can get rid of various unnecessary tools and outdated systems that are incurring huge costs to the company.

Efficient Portfolio Management

Every proposed investment should be carefully assessed to ensure there is efficient business case for the portfolio. It should also go through a standardised process depending on the unique goals of the organization. A proper planning is required for formulating various metrics and processes.

After selecting the stocks to be invested, the optimal portfolio is finalised and swift action should be taken. The efficient optimization and management of the portfolio should be done for ensuring that portfolio will generate good returns at an acceptable level of risks even in difficult economic times.

The product portfolio management involves grouping of major products that are developed and sold by businesses into (logical) portfolios. These products are organized according to major line-of-business or business segment.

The management team actively manages the product portfolios by taking decisions regarding the development of new products, modifying existing products or discontinue any other products. The addition of new products helps in diversifying the investments and investment risks.

Major tasks involved with Portfolio Management are as follows.

· Taking decisions about investment mix and policy

· Matching investments to objectives

· Asset allocation for individuals and institution

· Balancing risk against performance

As per the modern portfolio theory, a diversified portfolio that includes different types or classes of securities; reduces the investment risk. It is because any one of the security may yield strong returns in any economic climate.

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Portfolio Management for Young Investors

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Portfolio Management for Young Investors The young investors have to deal with unique set of challenges in portfolio management and one has to make every decision carefully in order to receive good returns on his/her investments.

Tips for young investors

Learning by making investments

The portfolio of young investors not only allows them to make money but also serves as an educational tool. Investors can become a knowledgeable investor by learning while doing.

Invest in savings

Young investors should focus their strategies for making enough savings to ensure rich retirement. Although it may sound like a simple advice, it should be emphasized and repeated. Most of the time, investors tend to procrastinate about investment in savings; however they should not ignore the savings from the beginning in order to reap the benefits at the end.

Get rid of any pending debt

Young investors should get rid of any pending loan amount as soon as possible by paying off credit card bills and other high interest loans. Investors can get rid of high interest charges that are incurred by paying them off. The average annual return from stocks is usually 10.7% and therefore it is impractical to expect the 20%+ returns as experienced by the expert investors in during last couple of years. Investors should not commence an investing commitment till the debt is cleared.

Savings are not investing

Young investors should not confuse savings with investing. For example, one should make savings for house, car, education or other, however one should avoid invest the savings in stocks and stock mutual funds. It is especially helpful in cases where one is planning to make a large purchase in coming 4 to 5 years. Any investment that is less than five years does not provide sufficient time for recovering from a significant drop in the market.

There are cases of bear market in the stock markets that are marked by sustained down market. When investors make investment for short time periods, a “correction” in the bear market may rob you off with your money at time when you need your money. If investors would like to make investments for a short-term objective, investors need to invest in money market fund, certificate of deposit, or short-term bond fund.

Taking Advantage of retirement plan

There are retirement plans where employee is required to make contributions. These plans allow the investor to invest his/her money and provide great opportunity for accumulating large amount of money. The money contributed by employee is tax-deductible and grow gradually without being taxed. In some cases, there are some companies that will match employee’s contributions and provide retirement plan as huge wealth building tool.

Automatic investments

Young investors should select an automatic investment plan as it enables the investors to pay for the investments before beginning to spend or pay other bills. It also inculcates discipline in the investor. It assists in avoiding the pitfalls of market timings. It also assists in making smart decisions as investors purchase more shares at low prices and fewer shares at high prices.

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Modern Portfolio Theory (MPT)

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Modern Portfolio theory (MPT) presents the concept of diversification in investing by using mathematical formulation. It aims to select a collection of investment assets which has lower risk than any individual asset. It can be observed spontaneously as dynamic market conditions cause changes in value of different types of assets in conflicting ways. The prices in the bond market may fall independently from prices in the stocks market, thus there is overall lower risk in a collection of both bond and stocks assets as compared to individual asset. Moreover, the diversification reduces the risk even if cases where assets’ returns are positively correlated.

Modern Portfolio Theory MPT stress the fact that assets in an investment portfolio must not be chosen individually where each asset is selected on the basis of its own merits. Instead, it is important to observe the changes in price of each asset relative to changes in the price of every other asset in the portfolio. Investing in the assets is basically the exchange between risk and expected return. The assets with higher expected returns are usually more risky.

A Portfolio Manager is responsible for building a portfolio of assets such as stocks, bonds and other assets that generates the maximum possible rate of return at the least possible level of risk. The portfolio management involves allocation of funds in various assets to achieve diversification of portfolio that offer maximum return at the lowest possible risk.

MPT assists in the selection of a portfolio with the maximum possible expected return at a given level of risk. Similarly, MPT assists in the selection of a portfolio with the lowest possible risk at a given amount of expected return. Thus, it is not possible to have a targeted expected return exceeding the highest-returning available security except there is possibility of negative holdings. MPT stresses the diversification and assists the portfolio managers in finding the best possible diversification strategy.

Modern portfolio theory (MPT) refers to the theory of investment that seeks to maximize the expected return of portfolio at a given level of risk. Similarly it also attempts to diminish risk for a given level of return expected. To achieve this, portfolio manager choose the proportions of different assets in a portfolio carefully. The modern portfolio theory is extensively used for practice in the financial industry, however basic assumptions of this theory has faced certain challenges in fields like behavioral economics.

In technical terms, a Modern Portfolio theory (MPT) represents the return of asset as a normally distributed function or as an elliptically distributed random variable where risk is defined as the standard deviation of return. According to MPT, the return of a portfolio is equivalent to the weighted combination of the assets’ returns because the portfolio is modelled as a weighted combination of assets. MPT aims to reduce the total variance of the return of portfolio by combining various assets whose returns are negatively correlated or not positively correlated. MPT assumes that the markets are competent and investors are logical

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How to Select an Optimal Portfolio

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An optimal stock portfolio refers to a stock portfolio that incorporates the stocks configured in such a manner that they yield the optimal return statistically possible at a given level of risk accepted by an investor. The modern portfolio theory stresses on the optimal portfolio concept by assuming that the investors try to minimize risk obsessively while looking for the highest return possible. As per this theory, investors should make rational decisions for achieving maximum returns at their acceptable level of risk.

The working of the optimal portfolio can be easily understood by looking at the chart below. The optimal-risk portfolio is generally found in the middle of the curve. If one goes further higher up the curve, it will mean taking more risk proportionately for achieving lower incremental return. Similarly if one goes at lower end of the curve, it will mean low risk/low return portfolios.

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Risk % (Standard Deviation)

As an investor, you can select how much risk is acceptable to you in the portfolio by selecting any other point that lies on the efficient frontier. It will provide you the maximum returns for the amount of risk acceptable to you. One cannot calculate the optimization of the portfolio mentally. Investors use various sophisticated computer programs for determining optimal portfolios by estimating hundreds or thousands of different expected returns at each level of risk.

For example, if you have $10,000 to invest to build your portfolio of stocks of three companies A, B and C; then you need to decide how much money should be invested in each stock that can provide best return possible at a level of risk acceptable by you. For this, let’s create 10 random portfolios where each portfolio comprises of different proportions of the three stocks A, B and C.

The RISK/RETURN profiles of all these portfolios are mentioned in table below.

Risk Return Profile

Portfolio A B C Risk Returns

Portfolio 1 32% 38% 30% 12.10% 11.51%

Portfolio 2 68% 12% 20% 15.54% 12.76%

Portfolio 3 27% 51% 22% 12.91% 11.59%

Portfolio 4 20% 20% 60% 9.89% 11.00%

Portfolio 5 60% 20% 20% 14.86% 12.71%

Portfolio 6 12% 74% 14% 13.48% 11.22%

Portfolio 7 15% 80% 5% 14.28% 11.40%

Portfolio 8 38% 19% 43% 11.76% 11.71%

Portfolio 9 42% 19% 39% 12.05% 12.49%

Portfolio 10 74% 10% 16% 16.35% 13.06%

In this table, you can observe that each portfolio has a unique RISK/RETURN profile because of different cash/stock allocation…

Risk/Reward Profile

After the analysis of the collection of stocks, those portfolio configurations that fall on the efficient frontier are considered as optimal portfolios. The various optimal portfolios are summarised in the risk/return table. This table allows the investors to choose that optimal portfolio which provide highest return statistically possible at a given level of risk acceptable to them.

Risk /Return Table of Optimal Portfolios

Risk Returns A B C

9.0% 10.98% 10% 21% 69%

9.5% 11.21% 18% 17% 65%

10.0% 11.73% 21% 15% 63%

10.5% 11.96% 28% 14% 58%

11.0% 12.23% 22% 19% 61%

11.5% 12.61% 30% 27% 43%

12.0% 12.83% 28% 21% 50%

12.5% 12.92% 37% 12% 51%

13.0% 13.02% 30% 38% 32%

13.5% 13.12% 26% 27% 47%

14.0% 13.23% 21% 46% 33%

Thus, the optimal portfolio configuration that contains three stocks (A, B, C) is the one that gives a return higher than 11.21% at a risk of 9.50%

Optimal Portfolio

Risk Return A B C

9.5% 11.21% 18% 17% 65%

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How to build a Profitable Portfolio

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Portfolio management is basically an approach of balancing risks and rewards. Investors should keep the following tips in mind while deciding about the right portfolio blend.

Goals: You should be clear about your goals as an investor. The objective of the portfolio management should be utmost clear if one wants to accumulate wealth by good returns or to hold on his investments.

How to build a Profitable Portfolio Risk Tolerance: As an investor one should know how to handle the fluctuations of ever changing volatile market. It is important to know the ways for tolerating the risks and subsequent rise and fall of net worth. If you are not capable of handling the pressure of sharp decline in the values of tour investments then you should try to invest in more stable funds/stocks. By this way, you may not make the returns quickly however it can offer you sound sleep at night.

Know your investments: It is recommended to invest in the stocks/funds of the businesses and industries that you are aware of. You should know the activities of the companies and procure knowledge about the sector you are investing in. This way you would be able to know if the company will continue to be successful. The performance of the specific business or industry cannot be easily predicted with certainty.

When to Buy/Sell: In order to succeed in the stock markets, it is very important to know when to buy or when to sell. You should do every purchase with a purpose, and constantly re-assess that purpose as per the prevailing market and other conditions.

Measuring Return on Investment (ROI): The performance of the portfolio is measured by the return on investment (ROI). The individuals can successfully formulate a logical money-management strategy by knowing the probability of returns received by each dollar invested.

ROI = (Gains – Cost)/Cost

The ROI can change depending on the improvement or worsening of the market conditions. It also depends on the kind of assets or securities held by the investor. In general, the higher potential ROI involves higher risk and vice-versa. Thus, one of the major tasks of the portfolio management is the proper risk control.

Measuring Risk: The risk tolerance of the person determines the pace of his/her returns. The risks and rewards are in essence interrelated to each other where tolerance of the risks tends to influence or even dictate the rewards. An investor whose goal is to maintain his/her current assets instead of growing them, he/she will keep only safe and secure investments in the portfolio.

Diversification of the portfolio: The diversification of the portfolio is required to minimize the risks and maximizes the returns in the long term. It is preferred to diversify your portfolio however; one should take care to avoid over-diversifying. The diversified portfolio led to smoothing of peak-and-valley pricing effects caused by the fluctuations in the normal market and in surviving long term market downturns. The over diversification can become counterproductive so it needs to be avoided.

Avoiding the gambling: As an investor, one should avoid portfolio that relies on high-risk, high-return investments. It is because; the higher speculative investment can lead to conditions where investor may require selling his holdings prematurely at a loss due to liquidity crisis and expected returns won’t materialize.

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Benefits of Portfolio Management

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There is large number of benefits of Portfolio Management that can provide high value returns in case it is performed on regular basis and implemented properly. There are many companies that aimed to utilize their management efforts on balanced project portfolio for achieving optimal performance and returns for the entire portfolio.

Benefits of Portfolio Management Maximize overall returns

The proper portfolio management ensures the proper mix of projects for achieving the maximum overall returns. The project portfolio comprises of projects that provide values that differ widely from each other. The projects in the portfolio vary in terms of following factors.

· Short- and long-term benefit

· Synergy with corporate goals

· Level of investment

· Anticipated payback

By considering all these factors, PPM focuses on optimization of the returns of the entire portfolio by doing the following activities.

· Executing the most value-producing projects

· Directing the funds towards worthy initiatives

· Eliminating the redundancies between projects

· Saving time and costs

Balancing the Risks posed by Projects

The PPM involves the balancing of the risks posed by the projects in the portfolio. The companies should evaluate and balance the projects’ risks in their portfolios for minimizing the risks and maximizing the returns by diversifying portfolio holdings.

A traditional portfolio may minimize the risk and protect principal; however it also limits the prospective returns. On the contrary, the hard-line project portfolio may provide greater chances of good returns however it also poses considerably higher risk of failure or loss. PPM balances the risks with potential returns by diversifying the project portfolio of the companies.

Optimal Allocation of Resources

The resources are optimally allocated among various projects of the portfolio. As the resources are really limited, all the projects should compete with each other for resources. PPM involves measuring, comparing, and prioritizing the projects in order to classify and implement the most valuable projects only. The conflicts between the projects for resources are resolved by the high level management. The skill sets required for each project and ideal source of these resources are determined by incorporating formal sourcing strategies.

Correction of Performance problems

The performance problems are corrected prior to their development in major issues. Although, PPM cannot completely get rid of performance crisis, however it assists in addressing the performance issues early. The PPM involves identification, escalation and addressing of any issues related to execution and helps in keeping the progress of projects on track.

Aligning projects according to business goals

PPM ensures that projects remain aligned to the business goals during their execution by performing following activities.

· Management oversight and monitoring throughout the project

· Standard communication and coordination

· Regular course correction for checking the project drifts

· Redirecting projects for maintaining alignment and changing business objectives

Executive level Project Oversight

Executives are involved for prioritizing and oversighting the project responsibilities. This ensures that projects receive the required support and they can be completed successfully. Executives have the required business acumen and they can align project by using various business strategies.

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