Answer the following questions:
  • How often will I monitor my portfolio?
  • How will I determine how well my individual investments are doing?
  • How will I determine how well my overall portfolio is doing?
  • How will I determine if my portfolio is meeting my expected return?
  • How will I determine whether losses fall within my accepted range?
To determine how well your individual investments and overall portfolio are doing, be sure to use the benchmarks you are trying to track. If you find that your portfolio is not meeting your expected return, or that losses are falling outside of an acceptable range, you may need to adjust your investments.
When monitoring, don’t focus only on performance, though. Make sure the reasons you chose these investments in the first place still apply. To do that, check the status of each investment against your Investment Selection Criteria. If a fund no longer meets your criteria, it may be a sell candidate.

In the past, many investment policy statements gave relatively cursory treatment to risk, its quantification and its potential impact on the asset pool. The market collapse and credit crisis of 2007-2009 demonstrated that many institutions’ portfolios carried unacknowledged risks, that their risk profiles in general were higher than they thought, and that the risk tolerance of their fiduciaries was lower than acknowledged. Today it is entirely appropriate to put risk at the top of the process of investment policy development.

Financial models, as the crisis demonstrated, are anything but infallible and, when consulted, must be used with care and a healthy degree of skepticism. It is nonetheless true that the results of an appropriate simulation or modeling study can assist fiduciaries in going beyond traditional risk definitions such as volatility to examine such critical parameters as the risk of permanent loss, year-to-year declines in spending, and recovery periods. These metrics both enable and force a discussion about tolerable levels of risk, the conclusions from which can be used to guide the construction of a range of potential portfolios that embody those risks that are deemed acceptable. Projected returns from these portfolios are an outcome which, if considered insufficient, indicate either acceptance of lower contributions for the acceptable level of risk or mandate a more robust discussion about the relationship between risk assumption and needed long-term returns. Thus, in this proposed structure, instead of starting with return, committees work toward it. If, ultimately, the projected range of returns is seen as ‘too low’ compared to anticipated institutional needs, then the fiduciaries must either reconcile themselves to the fact that the target return is beyond their reach given their risk limits, or accept the necessity of embracing additional risks and explicitly acknowledge them in the investment policy statement.

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