Wealth Management

Topics
Wealth Management
Portfolio Styles: Active Vs. Passive
Asset Allocation
Monitoring And Revision Of The Portfolio
Five Golden Rule

Wealth Management

Retiremen
Retiremen
tt planning
planning

Lifestyle
Lifestyle
review
review and
and
income
income
requireme
requireme
nts
nts

Family
Family
Needs
Needs
Planning
Planning

Education
Education
planning
planning

Planning
Planning
for
for
support
support of
of
aging
aging
parents
parents

Lifetime
Lifetime
cash
cash flow
flow
analysis
analysis
Risk
Risk
Review
Review

Family
Family
protection
protection

Comprehensive
Comprehensive Financial
Financial Planning
Planning

Business
Business
Successio
Successio
n
n Planning
Planning

Work
Work
based
based
pension
pension
benefit
benefit
assessme
assessme
nt
nt
State
State
pensions
pensions
and/or
and/or
social
social

Income
Income
protection
protection

Executive
Executive
Compensa
Compensa
tion
tion
Managem
Managem
ent
ent

Estate
Estate
Planning
Planning

Wills
Wills

Specific
Specific
tax
tax
planning
planning

Power
Power of
of
attorney
attorney
(POA)
(POA)

Business
Business
needs
needs
review
review

Cash
Cash
managem
managem
ent
ent and
and
capital
capital
needs
needs
assessme
assessme
nt
nt

Share
Share
option
option
scheme
scheme
strategies
strategies

Trusts
Trusts

Estate
Estate tax
tax
funding
funding

Gifting
Gifting

Charitable
Charitable
giving
giving

Liaising
Liaising
with
with family
family
as
as
required
required

Business
Business
valuation
valuation

Successio
Successio
n
n plan
plan
document
document
ss

Successio
Successio
n
n
plan
plan
funding

Business
Business
and
and
Personal
Personal
Protection
Protection

Family
Family
and
and
personal
personal
protection
protection

Life
Life insurance
insurance

Long-term
Long-term
care
care

Income
Income
protection
protection

Managing
Managing
annual
annual
bonuses
bonuses
Estate
Estate and
and
financial
financial
planning
planning
(particular
(particular
to
to
executive
executive
compensa
compensa
tion
tion
managem
managem
ent)
ent)

Business
Business
protection
protection

Keyman
Keyman
insurance
insurance

A. Categorizing
Individual Investors
Salary

Earners Government/Private
Self Employed/Entrepreneurs/Traders
Professionals
Others Students, Housewives, Retired
Individuals
They can further be categorized into
Beginners
Middle Level
Final Level

Salary Earners
Every

month Salary is wealth

accumulation
Rule of Thumb : Always hold 3 months
salary in savings (job change/delay in
payout)
Beginners: Be more aggressive (no or
less liabilities, consistent income level)
Mid career people Be Moderate ( more
liabilities, commitments)
HNIs A balance of Moderation and
Aggressiveness ( More Money)

Self
Employed/
Entrepreneurs/ Traders
Investment

Own
Funds/Borrowed Funds
Average of Income Earned every
month
Insurance cover for business and
personal needs
Surplus funds on savings
Funds for further investment in
business
Loan repayment

Professionals
Average

earnings every month

Loans for setting up Professional
Practice and its repayment
Monthly commitments
Surplus savings
Fund for further investment
Investment in Real Estate
Sole proprietorship/ Firm/Company

Others Students, Housewives,

Retired Individuals etc
Housewives

and
Retired
individuals
should
choose
investments
that
are
safe,
followed by returns and liquidity.
Tax
saving
aspect
of
the
investment is less important
Students should invest in very
safe securities that can also yield
them high returns, liquidity and
tax saving aspects can be given
lesser importance

Categorizing Financial
Planning
Tax

Planning
Insurance Planning
Retirement Planning
Estate Planning
Investment Planning/Wealth
Management

Investment and Wealth

Planning
It

is all about weaving an investment net

with

Equity
Fixed Income Deposits
Post Office Schemes
Gold
Commodities
Currency
Derivatives
Mutual Funds
Exchange Traded Funds
Real Estate

Asset Mix Investments

Asset

mix is the balance between

stocks, bonds and cash, returns and
risk level monitor
Stocks - greater growth & greater
volatility
Gold the bumper crop
Mutual Funds the fund equalizer
EFTs the norm
Real Estate the cash cow

Life Stage and Right Asset

Mix

Life Stage 1

Life Stage 2

Life Stage 3

Stoc
ks
65%

Cash
0%

Bond
s
35%

Stoc
ks
50%

Cash
5%

Bond
s
45%

Stoc
ks
25%

Cash
10%

Bond
s
65%

Portfolio Styles: Active Vs.

Passive
Two types of investment portfolio
management:
Active Portfolio Management
Passive Portfolio Management

Passive Portfolio
Management
Holding

securities in the portfolio for the

relatively long periods with small and
infrequent changes;
Investors act as if the security markets are
relatively efficient.
The portfolios they hold may be surrogates
for the market portfolio (index funds).
Passive investors do not try outperforming
their designated benchmark.

Passive Portfolio
Management
Reasons when the investors with
passive
Portfolio:the investors preferences
change;
the risk free rate changes;
the consensus forecast about the
risk and return of the benchmark
portfolio changes.

Active Portfolio Management

Active

investors believe that from

time to time there are mispriced
securities or groups of securities
in the market;
The active investors do not act as
if they believe that security
markets are efficient;
The active investors use deviant
predictions their forecast of risk
and return differ from consensus

Active Vs Passive
Active investment
management
To achieve better results
Aim
then average in the market
Short term positions, the
Strategies used and decision quick and more risky
making
decisions; keeping the hot
strategy
Investor/manager
Tense
Taxes and turnover of
High taxes, relatively high
investment portfolio
turnover of portfolio
In average equal to the
Performance results before
passively managed
costs and taxes
portfolios
Area of comparisons

Performance results after

costs and taxes
Supporters

Analytical methods

In average lower than

market index after taxes
All brokerage firms,
investment funds, hedging
fund, specialized investment
companies
Qualitative: avoiding risk,
forecasts, emotions,
intuition, success,
speculation, gambling

Passive investment
management
To achieve the average
market results
Long term positions, slow
decisions
Laid-back
Low taxes, small turnover of
portfolio
In average equal to the
actively managed portfolios
In average higher than the
results of actively managed
portfolio returns after taxes
Passively managed pension
funds, index funds
Quantitative: risk
management, long term
statistical analysis, precise
fundamental analysis

ASSET ALLOCATION

An asset allocation focuses on determining the

mixture of asset classes that is most likely to
provide a combination of risk and expected
return that is optimal for the investor. Asset
allocation is a bit different from diversification. It
focus is on investment in various asset classes.

Two categories in asset allocation are defined:

Strategic asset allocation;

Tactical asset allocation.

Strategic
Allocation

Asset

Strategic asset allocation identifies asset

classes and the proportions for those asset
classes that would comprise the normal asset
allocation. Strategic asset allocation is used to derive
long-term asset allocation weights. The fixedweightings approach in strategic asset allocation is
used. Investor using this approach allocates a fixed
percentage of the portfolio to each of the asset
classes, of which typically are three to five. Example
of asset
might be as follows:
Asset
classallocation in the portfolio
Allocation(%)

Common stock

40

Bonds

50

Short-term securities

10

Total portfolio

100

Tactical Asset
Allocation

Tactical asset allocation produces temporary

asset allocation weights that occur in response to
temporary changes in capital market conditions. The
investors goals and risk- return preferences are
assumed to remain unchanged as the asset weights
are occasionally revised to help attain the investors
constant goals. For example, if the investor believes
some sector of the market is over- or under valuated.
The passive asset allocation will not have any
changes in weights of asset classes in the investors
Asset class
Alternative asset allocation
portfolio the weights identified by strategic asset
Conservative( Moderate(% Aggressive(%)
allocation are used.

%)

Common stock

20

45

65

Bonds

45

40

30

Short-term
securities

35

15

Monitoring And Revision Of

The Portfolio
Portfolio

Revision
Rebalancing A Portfolio

Portfolio Revision
Portfolio

revision is the process of selling

certain issues in portfolio and purchasing
new ones to replace them.
The main reasons for the necessity of the
investment portfolio revision:
As the economy evolves, certain industries and
companies become either less or more
attractive as investments;
The investor over the time may change his/her
investment objectives and in this way his/ her
portfolio isnt longer optimal;
The constant need for diversification of the
portfolio.

Portfolio Revision
Three

areas to monitor when

implementing investors
portfolio monitoring:
1. Changes in market conditions;
2. Changes in investors
circumstances;
3. Asset mix in the portfolio.

Portfolio Revision
When

monitoring the changes in the

investors circumstances, following aspects
must be taken into account:

Change

in
in
in
in
in

wealth
Change
time horizon
Change
liquidity requirements
Change
tax circumstances
Change
legal considerations
Change
in other circumstances
investors needs.

and

Rebalancing A Portfolio
Rebalancing

a portfolio is the process of

periodically adjusting it to maintain
certain original conditions.

Rebalancing

reduces the risks of losses in

general, a rebalanced portfolio is less volatile
than one that is not rebalanced. Several
methods of rebalancing portfolios are used:

A.
B.
C.

Constant proportion portfolio;

Constant Beta portfolio;
Indexing.

A.

Constant
Portfolio (CPP)

CPP

Proportion

is one in which adjustments are

made so as to maintain the relative
weighting of the portfolio components as
their prices change.
Investors should concentrate on keeping
their chosen asset allocation percentage.
There is no one correct formula for when
to rebalance.
One rule may be to rebalance portfolio
when asset allocations vary by 10% or
more

B.

Constant
(CBP)

Beta

Portfolio

The

base for the rebalancing

portfolio using this alternative is
the target portfolio Beta.

Over

time the values of the

portfolio components and their
Betas will change and this can
cause the portfolio Beta to shift.

B. Constant Beta Portfolio

(CBP)
The

target portfolio Beta is 1.10 and it had risen

over the monitored period of time to 1.25, the
portfolio Beta could be brought back to the
target (1.10) in the following ways:
Put
additional money into the stock
portfolio and hold cash.
Put
additional money into the stock
portfolio and buy stocks with a Beta lower
than the target Beta figure.
Sell high Beta stocks in portfolio and hold
cash
Sell high Beta stocks and buy low Beta
stocks

C. Indexing
This

alternatives for
rebalancing the portfolio are
more frequently used by
institutional investors (often
mutual funds).
Because their portfolios tend to
be large and the strategy of
matching a market index are best
applicable for them

FIVE Golden Rules

Which An INVESTOR Should
Follow
Rule

#1 Use Banks for financial

transactions,
short
term
cash
management and credit management.

Rule

#2 Use Insurance to cover the risks.

Rule

#3 Use Gold to hedge your currency

(i.e. Rupee).

Rule

#4 Use Real Estate for consumption

(Residence) or regular income (rent).

Rule

#5 Use Capital Market to Create

Long Term Wealth.

Unfortunately, what people do

mistakes:People

tend to use Banks and

Insurances for investments
Gold for consumption ( Jewellery )
Real Estate for long term wealth
creation and
Capital Markets for speculation
and short term gain.

* Needless to say, why they fail to

create wealth.