- Create a Policy Statement -A policy statement is the statement that contains the investor's goals and constraints as it relates to his investments.
- Develop an Investment Strategy - This entails creating a strategy that combines the investor's goals and objectives with current financial market and economic conditions.
- Implement the Plan Created -This entails putting the investment strategy to work, investing in a portfolio that meets the client's goals and constraint requirements.
- Monitor and Update the Plan -Both markets and investors' needs change as time changes. As such, it is important to monitor for these changes as they occur and to update the plan toadjust for the changes that have occurred.
Factors Affecting Risk ToleranceAn investor's risk tolerance can be affected by many factors:
- Age- an investor may have lower risk tolerance as they get older and financial constraints are more prevalent.
- Family situation - an investor may have higher income needs if they are supporting a child in college or an elderly relative.
- Wealth and income - an investor may have a greater ability to invest in a portfolio if he or she has existing wealth or high income.
- Psychological - an investor may simply have a lower tolerance for risk based on his personality.
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