The portfolio strategy selected would have to be in conformity with both the investment objective and investment policy guidelines. Any contradiction here would result in a systems break down and losses.
Let's consider a person with a job that keeps him busy for 10-12 hours a day, five days of the week. On Saturday he helps the family with household chores. On Sunday he takes the day off and enjoys himself. Now with such a busy life, we cannot expect him to obtain optimal returns from investments in the equity market. Where is the time for thought, analysis and action? He would at best be playing a game of Russian roulette. For a person with such a busy life schedule it would be best to invest in fixed income securities. These would include RBI bonds, Bank deposits, insurance, etc.
Where there is a lower but assured return. However, if this average, hard working and successful person still wants to invest in the equity market for a relatively higher rate of return. Then he would have to create the time for the thought, analysis and action required for success in this endeavor.
Portfolio strategies are mainly of two types; which are active portfolio strategies and passive portfolio strategies. Active strategies have a higher expectation about the factors that are expected to influence the performance of the asset classes. While passive strategies involve a minimum expectation input. The latter would include indexing which would require the investor to replicate the performance of a particular index. Between these two extremes we have a range of other strategies which have elements of both active and passive strategies. In the fixed income segment, structured portfolio strategies have become popular. Here the aim would be to achieve a predetermined performance in relation to a benchmark. These are frequently used to fund liabilities.
The individual investors who wish to adopt an active portfolio strategy would be required to look into matters of market timing, sector rotation, stock selection and conceptualization.
Market timing the purchase of stocks in the stock market would by default reduce the subsequent holding period of the stocks held in the portfolio with the expectation of a reasonable expectation of return at the point of sale, with the advantage of the financial resources again being available to be applied with regard to other stocks which may provide both opportunities of purchase as well as a fair margin of safety at the point of their subsequent purchase. This would also result in the turning over of the investment capital during the financial period in which this strategy is implemented.
Sector rotation would require an understanding of the segregation of the various stocks into appropriate industries and service sector groups. The investor may now consider short listing the top three to five corporate entities from each of the lead industries and service sector groups for a further study to decide whether the stocks short listed are of investment grade. Thereafter, the investor would be required to move the investment capital from one industry and/or service sector group to another depending on the availability of a fair margin of safety while engaging such stocks and adequate profits while disengaging from them.
Stock selection would require a short listing of the investment grade stocks for analysis based on fundamental parameters to confirm their present status of being investment worthy. A further study to check and confirm whether the current market price of such stocks is below its intrinsic value and offer a fair margin of safety; this may also require the application of technical tools to reconfirm a probable oversold condition at the time of such analysis.
Conceptualization would require the investor to have at hand an investment philosophy, upon which subsequent investment decisions would be based. This philosophy would be based on an understanding of various forces which effect the stock markets and the movement of the prices of stocks traded in them. Forces would include demand supply mismatches in the stock market itself as well as in other allied markets (like commodities and forex amongst other such markets including global, regional and national) which may influence its performance, stock market psychology (an oscillation between fear and greed), political (including government policies) stability or otherwise of the nation in which the stock market exists, amongst others. In addition, the investor would also be required to segregate the stocks short listed into categories of growth, bell weathers, stars, cyclical, technology based and asset rich. Thereafter, the investor would either choose a value based or growth based approach.
In the long run, the individual investor would find that the above selection of the portfolio strategy and its subsequent implementation would be intuitive. It would require the individual investor to ascertain whether he has the time to take on the challenges offered by this shift form a passive portfolio strategy to an active portfolio strategy stance. If it is found that the time required for this exercise is not readily available, then the individual investor may continue to maintain the expected present stance of a passive portfolio strategy. Of course, a passive portfolio strategy stance would have the advantage of safety of the investment capital although at a lower rate of return or growth; but, then again the individual investor would have a larger investment capital base to start with, when he does get around to adopting an active portfolio strategy stance. The individual investor would also realize that selecting an appropriate portfolio strategy is but one link (or part) of what may be called the portfolio management framework. That the individual investor chooses to be cautious at all times would hold him in good stead in the long run.
As a word of caution and a disclaimer of sorts, the investor must appreciate that the above selection of the portfolio strategy is only indicative of aspects the investor would have to consider while shifting from a passive portfolio strategy to an active portfolio strategy. The investor would be required to document his own investment objective and investment policy; and subsequently clearly state (or select) the appropriate portfolio strategy to be adopted for subsequent investment decision making. It would be fair to say that selecting the portfolio strategy, monitoring its performance and subsequent revalidation would indeed be a dynamic process. The saving grace of course would be that one part is linked to the other and therefore a change proposed to be implemented in any one part would require an revalidation of the other parts. These parts being; selecting the portfolio strategy, establishing investment policy and setting the investment objective.