Test Time

I love to read and learn. Last week I was in a book store and $95 later I left with a new book entitled, “Managing Investment Portfolios – A Dynamic Process.” It contains an abundance of useful information for money managers. It clearly spells out, in detail, the entire money management process, including a section on creating an IPS. First, investor constraints must be clearly understood. These include liquidity needs, time horizon, tax concerns, legal and regulatory factors, and unique circumstances. Another part of the IPS is an investor’s risk tolerance and risk ability. Risk tolerance is determined by a standard risk questionnaire and is different from risk ability. Whereas risk tolerance measures an investor’s willingness to assume risk, risk ability measures the amount of risk they should take. For example, if clients need to withdraw income from their portfolios in the near term, they should not assume much risk even though they may be willing to do so.

So that’s where I am at this point: constraints, risk tolerance, and risk ability. I have developed a questionnaire for each of these.

Using a semi-active management process (somewhere in between active and passive), the IPS will also include a minimum and maximum allocation for broad categories only. This will allow me to make tactical adjustments within each category.

I’ll keep you posted on the progress.