Portfolio Management
What is a portfolio and how does it work?
Portfolios are established through the combination of stocks and bonds and the money markets. Within these stocks, for instance, you can have a variety of different companies, from large companies that we discussed, the Proctor and Gambles, the Johnson and Johnsons, the Microsoft's and the Intel's, to the smaller companies that are just up-and-coming. You also could throw into that mix the international side, which we're seeing more and more of. That would be on the equity side. On the bond side would be government bonds. They could be corporate bonds, or they could be municipal bonds. Municipal bonds are bonds that are issued by municipalities. For instance, here in the state of California, in the city of Los Angeles, we issue Los Angeles County water bonds, and if you buy those bonds you receive both federal and state tax exemption on the interest that you earn. If you put all of these pieces together into a pool, it is what a portfolio is.
What is 'portfolio management'?
Portfolio management we feel really starts with understand individuals themselves. So finding out goals and objectives that the individual might have, and then build a portfolio according to the needs of the client.
How does a money manager determine appropriate asset allocation?
A money manager will determine the appropriate asset allocation by understanding the clients goals and objectives, and from there they will be able to determine what percentage of stocks or bonds should be inside a portfolio.
How does a money manager determine the risk analysis for a portfolio?
A money manager would not determine the risk analysis according to the money manager's objectives, but rather to the client's objectives. This is done to better understand what the client's needs are in terms of whether they be income, whether they be growth, or a combination, would determine the risk of the portfolio.
How does a money manager determine goals and objectives for portfolio managerment?
A good money manager determining goals and objectives of a client would go through an interview process with the client themselves, and would determine where the client sits today. That might be the age that they're at, it might be how many children they have, it might be college planning, for retirement planning, to a host of different issues which would determine the client's ability to absorb risk or to set up a balanced portfolio.
How does a money manager determine the best allocation for a portfolio according to risk?
The best allocation according to risk would really have to do with the individual or the group of individuals themselves. Some individuals who have outside assets, and maybe they'd be fixed assets, i.e. real estate, or they have income that's being produced, might be willing to accept greater risk in an investment portfolio which would mean adding more stocks, and that might be domestic stocks like we discussed, Proctor & Gamble, Johnson & Johnson, and those are large cap value companies or international companies which would add a bit more risk to, but would allow, hopefully, some potential for higher growth.
What is a 'bond'?
A bond is a debt instrument, which is basically an IOU. For example, when the government issues a bond, the government says we are issuing you a treasury bill, bond or note. We'll give you this piece of paper if you lend us money and we're willing to give you interest on your money and pay your money back at the end of the period. So, a government issues 3-month, 1-year or 10-year bonds, for instance, on a 3-month bond they'd be willing to pay you 5 percent for 3 months, and at the end of the 3 month period of time they'll give you your money back plus the interest. So it's basically just a straight IOU.
What is a 'stock'?
A stock is issued by a publicly held company. And what it's basically doing is giving you the opportunity to have ownership in that company. So that if the company does well, your asset or your ownership should increase in value. It also gives you the advantage or the opportunity to have a dividend payment, if a company chooses to pay out a dividend. And that is excess earnings or revenues that is earned by the company itself.
What is a 'mutual fund'?
A mutual fund is put together by a manager, such as myself, who is hired by a company or actually even puts it together himself. What he does is he goes out and purchases a group of companies and offers shares or units out to individuals for a net asset value or price. So let me give you an example of that. Let's say an individual comes into a situation where they have a small amount of money and they want to invest in a pool of companies, but because they have a small amount of money, they are unable to purchase the stocks individually. You can't purchase, or you can but it would be very expensive, to purchase one share of IBM or one share of Proctor & Gamble or one share of AT&T. But you can, for a small amount of money, through a mutual fund, purchase all of those companies at one time, and you do that through a mutual fund.
