My Personal Finance Journey

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Portfolio Review 2008: The Introduction

Contributed by mm | January 13, 2008 6:52 PM PST

portfolioreview2008.jpgI first realized that the game rules of my personal finance journey have permanently changed back in the summer of 2006. First, one day I woke up in the morning and found out my portfolio was worth half a million. Then, more frequently, my portfolio started to generate five-figure monthly ups and downs, replacing my savings as the main theme of my monthly net worth fluctuation.

In the spirit of holistically reviewing my portfolio management practice and determine course of action, one year ago, I published a series of 9 articles called "Reengineering My Portfolio Management" over a course of 2 weeks. In retrospect, the thought exercise worked out great. I finally put my portfolio management onto the right track by setting up target asset allocation, declaring a benchmark, and reporting to the audience about my success and failure on a regular basis.

To some extent, I guess I'm subject myself to external scrutiny so that I can consciously spend more time in getting this right. After all, if early retirement is what I'm after, I will have to master portfolio management so in the decades after I bid goodbye to the corporate career ladder, my family and I will continue to live a happy and stress-free life.

Therefore, I decide to take my investing practice to the next level by kicking off a new series of "Portfolio Review 2008," in which I plan to reflect on what I learned in the past (especially in the last year), look into the future, and solidify my portfolio management approach.

Practicing the second habit of highly effective people, I'm starting by laying out the framework of this series upfront. I envision this series should include the following chapters:

1. Where Is the Alpha?

Recognizing that my first year of systematic portfolio management is quite successful since I beat my benchmark index by almost 2 full percentage points, I will do a deep dive of my results in 2007 and understand what constitutes the portfolio alpha in the passing year to understand whether it is stock picking, mutual fund picking or slight diviation from the allocation that contributes to the performance.

2. What Did I Learn in 2007?

After dissecting the quantitative results of my portfolio in 2007, I will reflect on the lessons I learned in 2007, and summarize some conceptual best practice of investing.

3. Revisiting My Portfolio Objectives

Revisit the portfolio objectives and constraints I set on record last year, and decide if any revision is needed.

4. Should I Venture Into Uncharted Territories?

Impressed by the starry long-term track record of both Harvard's and Yale's endowment funds, and the underlying atypical asset allocation that supported the performance, I plan to educate myself about the non-traditional asset classes they use, and determine whether I should start having exposure of such assets.

5. What's My Target Asset Allocation?

If the previous step concludes that I should add new asset class(es) to my portfolio, I will then determine how much exposure I should have in each asset class (including those I'm already heavily investing in).

6. Best Vehicle Toward Target Allocation

Then I will drill down into each asset class, and possible investment vehicles available to me, to hand pick the right investment vehicle for me to achieve the desired asset allocation.

7. Execution Plan

I would assume the above analysis will mean a quite different asset mix and a number of new vehicles I will start to acquire. Then the question becomes: how I should evolve my current portfolio to the desired asset allocation plan over a certain period of time.

8. Benchmark

I shall revisit my current benchmark and decide if I need any revision to reflect my refined portfolio objectives

9. The Rhythm

This is about how I conduct regular portfolio review activities, like rebalancing, performance review, and future planning so that I can consistently monitor the development and do course correction if necessary.

I guess each of the above bullets will finally take one or more posts, so given the ambitious scope of my synopsis, it will take a while for me to wrap this up. Therefore, I request your patience and constant feedback through this exercise.

In the meantime, what do you feel about the storyline? Did I miss anything? Please feel free to comment on how you feel about the framework.

This Post Has Received 27 Comments. Share Your Opinions Too.


Creative Investor Commented on January 23, 2008

MM: I just wanted to comment on your interest in the Harvard and Yale asset allocation. I've also been reading up on that and tend to agree with a point of view that this kind of asset allocation is far from ideal for an individual investor. 1) They change allocations frequently based on the research by a team of analysts; 2) Endowment fund's risk tolerance need not be identical to your risk tolerance; 3) They have huge amounts of money to invest in while individuals are much more flexible and can get solid returns without a research effort from a team of analysts; 4) They have economies of scale when it comes to cost associated with various investment vehicles they employ, even individuals with multi-million portfolios can't match that kind of economies of scale.


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