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The New Wealth Management: The Financial Advisor's Guide to Managing and Investing Client Assets by Harold Evensky, Stephen M. Horan, Thomas R. Robinson, Roger Ibbotson

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CHAPTER 14

PORTFOLIO MANAGEMENT

Asset allocation policy should be long-term but not rigid.

—Ng Kok Song, Group Chief Investment Officer, Government of Singapore Investment Corporation, and Chairman, Wealth Management Institute

Earlier chapters discussed the importance of asset allocation and investment policy, as well as the use of techniques such as optimization to select an appropriate asset allocation, given a client’s risk tolerance and assumptions about capital market expectations. This resulting asset allocation is referred to as strategic asset allocation or policy allocation. A strategic asset allocation is designed to meet long-term goals using long-term risk and return expectations. After a client’s strategic asset allocation is selected, the wealth manager must implement the policy, which requires a number of additional decisions, including selecting appropriate investments within each asset class and managing the resulting portfolio. Questions to be answered include:

  • Should the short-term asset allocation differ from the strategic asset allocation?
  • Within asset classes, what strategies or styles will be selected?
  • Will the wealth manager choose money managers to manage investments within each asset class?
  • Will the wealth manager use pooled investment vehicles, separate accounts, and/or direct investments in securities?

SHORT-TERM ASSET ALLOCATION

The strategic asset allocation is intended to be long-term in nature. Some wealth managers maintain this asset allocation ...

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