Portfolio Plan

A portfolio plan is an investment strategy that guides the allocation of an individual or institutional investor’s money.

A portfolio plan acts as a blueprint for making investments by spelling out an investor’s goals, risk tolerances and return expectations. The plan spells out the percentage of money allocated to different assets (such as stocks, bonds or real estate), as well as a process for deciding which individual securities to invest in. Other factors can include investment horizon, liquidity needs, taxes and local laws (particularly for public, tax-payer funded, plans like pension funds).

Guidelines should also be laid out for hiring and firing outside money managers, a decision-making or governance structure, and how often the plan should be reviewed.

For large investors working on behalf of beneficiaries or donors, a strong portfolio plan is a good risk management tool. It serves as a checklist to ensure prudent investment and can help shield large investors against lawsuits claiming of breach of fiduciary duty in the event of large losses.

An individual investor can construct a portfolio plan alone or with the help of an investment advisor. A strong individual plan will have many of the same features used by larger investors.

In large investment organizations, an investment committee will often work with one or more consultants to determine the organization’s goals, risk tolerances and asset-class expectations. Other factors considered can include liquidity needs, taxes and local laws. For example, prior to a law change in 2013, public pension funds in Phoenix, Ariz, were prohibited from investing in such alternative asset classes as private equity, high-yield debt and real assets. The passing of local Proposition 202 opened the possibility of investing a wider-variety of assets.

A formalized portfolio plan includes policies for making investments decisions, including hiring and firing outside money managers. Once a portfolio plan is set, all investment decisions made by internal staff and outside managers must adhere to the plan. A strong plan can include a statement of purpose, governance or decision-making structure, investment philosophy, investment objectives, investment strategy (including asset allocation), risk philosophy and tolerance, portfolio monitoring process.

All of the factors listed above can be found in the investment policy of the Contra Costa County Employees’ Retirement Association, a large public pension fund that invests billions of dollars on behalf of its beneficiaries.