Tuesday, May 16, 2006

Portfolio Management - Know what you own

I'm reading a very interesting book relating to risk management, Upside Downside: Simple Rules of Risk Management for the Smart Investor. As reported on another aspect of the book, over here, it's a light read and a rather small book - nevertheless, it has some good ideas.

This section of the book is pretty straightforward, simply telling investors that they should "know what they own". Advisors have often found that investors don't really "know what they own" - that is, they rarely deconstruct their portfolios to find out the overall composition. What this means is that you look at all the mutual funds/ETfs you own, you go to their web-sites and write down the 10 largest positions and also the sector orientations.

Do this for all your positions - begin to place them in a setting, the same way that you often see; Growth, Value, Small Cap, Large Cap and so on. Consider the weightings of your sector investments, and finally, consider the individual companies that are hidden within your funds, and also those as individual purchases.

In this way, you can begin to get some sense of how your portfolio might be exposed to the market, and you can consider scenario thinking, in analyzing its overall risk profile, so you can make sure you're happy with it.

Although it sounds simple, you might be surprised at the weightings or sector profile that your portfolio has "morphed" to, over time.


The Confused Capitalist

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