3. Investment portfolio forming

The aims of the portfolio forming are the next:

-    ensuring of the high current investment yield and of certain portfolio liquidity

-    the safety and the increment in a long-range outlook

-    the access to products and materials in a short supply, interest and non-property rights through securities purchase

-    the sphere of influence expansion and the property redistribution  [3:110]

While forming the portfolio the investor should stick to the next principles: safety, yield, liquidity and the growth of the laid-down capital. There can be outlined 6 main stages of the investment portfolio forming:

I stage – the choice of the optimal portfolio type for this specific investor;

II stage – the estimation of the acceptable combination of risk and return, i.e. the estimation of each security unit weight (according to the golden rule: the more risky the security is, the higher is its yield unit weight);

III stage – the assessment of the portfolio liquidity which is considered from the 2 points of view: as the possibility of the quick conversion the whole portfolio or its part into cash assets with low expenses on securities sale, and as the possibility of the corporation to redeem its liability towards creditors;

IV stage – the decision on the portfolio quantity structure, which means that the investor should define how many equity types should be included in the portfolio. An increase of these types doesn’t always imply a decrease of the risk level. The biggest risk reduction occurs when the portfolio consists of 8-15 different types of securities. The latter quantity increase is not reasonable as it may lead to negative consequences;

V stage – the decision on the initial portfolio structure and its possible future change adjusted for the state of the market;

VI stage – the future strategy choice of the portfolio management. [3:111-112] Thus, the problem of the investment portfolio forming is a serious and important one because portfolio’s features totally depend on how it is formed. And even Nobel Prizes are awarded for the ideas of how to create the optimal portfolio.

4. Investment portfolio management

After we got acquainted with the idea of the portfolio and how it forms, it is a high time we expatiated on management strategies of the obtained portfolio, because market is rapidly changing, and we have to modify our investments according to it. The investment portfolio should be managed in order to bring in desirable revenue. Under the notion “management” is seen a whole set of methods which provide maintenance of the originally invested sum, the attainment of the highest revenue and the risk reduction. Usually two types of management are singled out: active and passive ones. The active management is the management connected with a constant monitoring of the security market, an acquisition of the most efficient stock and a rapid deliverance from low-income shares. It implies a swift change of the investment portfolio composition. [2:15] That is why it is peculiar to aggressive portfolios. [3:115] At that, the monitoring is widely used, which helps to react quickly to short-term alterations on the equity market, and define the most attractive securities for the investment. The active management monitoring proposes:

•    the security selection (a purchase of highly profitable and a selling of unprofitable stock)

•    the assessment of risks and return of the new portfolio taking into consideration securities rotation

•    the comparison of the efficiency of the previous and the forming portfolios

•    the portfolio restructuring and the renewing of its structure. [2:15]

The passive management is the management, which results in forming the diversified portfolio and keeping it for a long period of time. The passive management monitoring includes:

•    the decision on the least possible yield level

•    the security selection and forming of the highly diversified portfolio

•    the optimal portfolio forming

•    the portfolio renewing if the yield reduction is under the possible limit. [2:16]

I want to complete this part by postulating that the choice of management tactics depends on the portfolio type, on the manager’s (investor’s) ability to choose securities and forecast the market state. If the investor isn’t able to choose stock and time properly, he should create the well diversified portfolio and hold the risk at the defined level. If the investor is sure that he can foresee a market state, he should change the portfolio structure according to market changes and the selected management type. For instance, it is difficult to expect the high yield, if to imply the passive management style to the aggressive portfolio. [3:115]