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Investment Business Plan/Portfolio Philosophy

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Portfolio Philosophy

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Even beginning investors need to lay out an initial investment plan. Assume changes or portfolio modifications will follow as one becomes more familiar with investing. But at least start with some savings plan. Apply the philosophy, invest as much as you can as early as you can. As one begins to save, the decision of what to do with the money becomes a challenge. Since different industries, market sectors, and asset classes perform at different levels during various market cycles, it behooves one to diversify investments over a variety of asset classes. Establishing an asset allocation plan for a portfolio is an important first step toward successful investing. Below are some guidelines and helpful hints.


1.0 Asset Allocation

  1. Determine an overall plan for a broad portfolio establishing percentage guidelines for each asset class. An example portfolio is available at [1] Look for the Sample.xls file. A more complex asset allocation spreadsheet is available on this same site. Look for the file AA-01-15-2005.xls.
  2. Divide the portfolio into growth and value investments. Use Morningstar guidelines. In some cases the investment will fall into what is known as a core investment or somewhere between a value and growth investment.
  3. Divide the portfolio into large, mid, and small-cap size. Some investors will prefer to use sales as the division points. Again, use Morningstar guidelines.
  4. Determine if the portfolio should include asset classes such as REITs, international, emerging markets, precious metals, bonds, etc.

The reasons or logic for developing a portfolio strategy is based on research done by Gary P. Brinson, L. Randolph Hood and Gilbert L. Beebower in their ground breaking paper, "Determinants of Portfolio Performance." Brinson, Brian D. Singer and Beebower followed with an update of the original paper in 1991. John Nuttall provides counter arguments to the Brinson et. al. papers in his article, "The Importance of Asset Allocation." To be sure, Brinson is frequently misquoted.

Ronald J. Surz, Dale Stevens, and Mark Wimer in their article, "Investment Policy Explains All" write, "For those who thought that the question of policy importance had been conclusively asked and answered by the authors' (Brinson et. al.) study, we now say it wasn't. The critics' arguments do contain some truth -- and some errors. Investment policy is not only the most important contributor to performance -- it is even more important than originally thought."

Later in the Surz et. al. article they write, "...this means that investment policy explains 112% of the performance of the average fund in the authors' study, a far greater number than originally suggested."

Several additional references advocating a well-developed portfolio can be found in the following books. "Four Pillars of Investing" - William Bernstein "The Intelligent Asset Allocator" - William Bernstein "Asset Allocation: Balancing Financial Risk" - Roger C. Gibson

2.0 Active Asset Allocation 

          What is Active Asset Allocation (AAA) and how does it fit into the Investment Business Plan?  
          Since AAA is part of Portfolio Management you are directed to this page.
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