Portfolio Revision Techniques

Portfolio Revision Techniques

Portfolio revision techniques are essential aspects of portfolio management that involve reviewing and adjusting a portfolio’s contents to achieve optimal returns. These techniques are used to modify a portfolio’s composition by adding, removing or reallocating assets in response to market changes, changes in investor objectives or changes in the economic climate. The primary objective of portfolio revision is to ensure that a portfolio’s risk and return characteristics align with the investor’s goals and risk tolerance.

One of the most common techniques used in portfolio revision is asset allocation. Asset allocation refers to the process of dividing an investment portfolio among different asset categories such as stocks, bonds, and cash. By strategically allocating assets, investors can achieve a balanced and diversified portfolio that mitigates risk while maximizing returns. Asset allocation is typically done according to the investor’s risk profile, investment objectives, and time horizon.

Another technique used in portfolio revision is rebalancing. Rebalancing involves adjusting the weightings of different assets in a portfolio to maintain the desired asset allocation. This is typically done by selling or buying assets to restore the portfolio’s original allocation. The main objective of rebalancing is to maintain the desired risk and return profile of a portfolio. Rebalancing is usually done periodically or in response to significant market changes that affect the portfolio’s asset allocation.

In conclusion, portfolio revision techniques are critical to portfolio management as they enable investors to make informed decisions on how to allocate, rebalance and adjust their portfolios to achieve optimal returns. By employing these techniques, investors can mitigate risks and maximize returns by ensuring that their portfolios align with their investment objectives and risk tolerance.

The goal of portfolio revisions is to maintain the optimal asset mix while keeping it in line with the client’s preferences. Revising and rebalancing a portfolio may be done on a period basis, ad-hoc basis or a combination on both, which ever works in the interest of the portfolio. Periodic rebalancing of the asset allocation can occur on a periodic basis say, every 3 months.

Rebalancing can occur on an “as-needed” basis by establishing an acceptable threshold of variation, and then rebalancing when the allocation of any asset surpasses the threshold. These methods can be combined, for example, rebalancing will occur when the current allocation is greater than ±5% from the strategic allocation but not less than every 6 months.

A ‘rule of thumb’ technique is used by many, but formula plans are popularly used. As mention in the previous section, the formula plans provide the basic rules and regulations for the purchase & sale of securities. These predetermined rules call for specified actions when there are changes in the securities market. In this, the investor divide the investment funds into 2 portfolios i.e. one aggressive (portfolio consists of equity shares) and other conservative or defensive (bonds & debentures).

 

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