When managing an investment portfolio, it is necessary to answer six straightforward questions.  The questions are what to buy, when to buy, how much to buy, what to sell, when to sell, and how much to sell.  All one needs to do is to have an adequate plan for answering these questions and the job is complete.  When the task of investment management is framed in this manner, some of the drawbacks of the more common approaches are exposed.  For example, if you read the financial press or check out the personal finance section of your local bookstore you will find a disproportionate amount of attention focuses on the first question, what to buy, and not nearly as much on any of the others.  What to buy is important, but it is not really the most important driver of investment performance.  The next two questions actually have more of an impact on overall performance.  The “how much” questions are much more significant than the others, but get relatively little attention.  Frequently, the answer to “how much” is the amount of “spare” cash lying around in an account.  This is a rather shortsighted way to manage a portfolio and can result in being poorly positioned when market trends change and can also lead to over- or under- allocations to important asset classes.  Investors who have not given ample consideration and attention to the “how much” question frequently are exposed to unnecessary amounts of risk due to their misallocated portfolios. Read the rest of this entry »