Portfolio Management Techniques

Various techniques help advisers construct and manage portfolios effectively. Understanding these strategies allows for matching approaches to client goals and preferences.

Dollar-Cost Averaging (DCA)

How It Works

Dollar-cost averaging involves investing a fixed dollar amount at regular intervals, regardless of the security's price.

Example: Investing $500 monthly in an index fund

Average Price: $47.50 per share Your Average Cost: $46.84 per share ($2,000 ÷ 42.7)

The investor's average cost is LOWER than the average market price because more shares were purchased when prices were low.

Benefits of Dollar-Cost Averaging

Limitations of Dollar-Cost Averaging

DCA vs. Lump Sum: The Evidence

Research shows lump sum investing outperforms DCA approximately 66-75% of the time historically because:

• Markets generally rise over time
• Being invested earlier captures more upside
• DCA keeps money in cash longer

However: DCA may be psychologically easier during volatile markets and prevents the regret of poorly-timed lump sum investments.

Sector Rotation

Concept

Sector rotation involves shifting portfolio allocations among economic sectors based on the business cycle.

Economic Cycle and Sectors

Challenges with Sector Rotation

• Requires accurate economic forecasting
• Timing is difficult
• Transaction costs and taxes
• Market may already price in cycle changes

Buy and Hold Strategy

Definition

A long-term strategy of purchasing securities and holding them regardless of short-term market fluctuations.

Philosophy: Time in the market beats timing the market.

Core-Satellite Approach

Structure

Benefits

• Captures market returns at low cost (core)
• Allows for active bets where they might add value (satellite)
• Balances cost efficiency with flexibility
• Reduces overall portfolio expense ratio

Diversification Strategies

Types of Diversification

The Diversification Benefit

• Combining assets with low correlations reduces portfolio volatility
• Most diversification benefit achieved with 20-30 securities
• International diversification adds value due to different economic cycles
• Asset class diversification is most impactful

Dividend Strategies

Dividend Growth Investing

Focus: Companies that consistently increase dividends over time.

Dividend Aristocrats: S&P 500 companies that have increased dividends for 25+ consecutive years.

In Practice

When selecting techniques:

• DCA: Good for regular savers, volatile markets, risk-averse clients
• Lump sum: May be better for those with cash available and long horizons
• Core-satellite: Balances cost efficiency with active opportunities
• Buy and hold: Appropriate for long-term investors who can tolerate volatility

On the Exam

Series 65 frequently tests:

• Understanding how DCA works (fixed dollars = more shares when prices low)
• Recognizing that DCA reduces timing risk but may underperform lump sum
• The core-satellite approach combines passive core with active satellites
• Sector rotation requires accurate economic cycle forecasting

Key Takeaways

1. DCA invests fixed dollars at regular intervals—buys more shares when prices are low
2. Lump sum often outperforms DCA because markets generally rise
3. DCA reduces timing risk and removes emotion from investing
4. Sector rotation shifts allocations based on the business cycle
5. Core-satellite combines low-cost passive core with active satellites
6. Buy and hold minimizes costs and taxes for long-term investors