Several years ago I was working for a firm headed by an old friend. This was right after the internet bubble burst. People were starting to lose money and many of the "reps" were unclear on what to do next. He wanted me to help set up a system of alerts so they could monitor their accounts and better manage risk. As I looked at the accounts and the holdings they were what I would call typical retail accounts; fad stocks and popular funds, A shares, B shares a little of this and a little of that. Where do you start? I took a piece of paper and drew three large boxes and labeled them, FIXED INCOME, INDEX FUNDS, EVERYTHING ELSE. I then went through each holding and put it in one of those boxes. When I was done I had a better picture of what I was looking at and where the damage was coming from. Were they overexposed to small cap growth stocks, holding underperforming mutual funds, too heavy in emerging markets, underweight in the fixed income area, overweight in one industry or stock. Were they sitting on dead money? The questions I had to ask were, Was the mix right for the client and the changing investment climate, and were there better choices available among the various holdings. Working together we were able to upgrade the mix to better reflect the profile of the client and upgrade specific holdings where we found better choices. We were able to identify the sources of risk and return and rebalance the portfolio to create a more stable posture in that environment. We then added an active component - some tactics and strategies to provide a proactive way to adjust to future developments.
That was Modular Portfolio Reconstruction. For a technical description go to the sidebar.>>
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