Block K · Portfolio & strategy

‹ Financial markets handbook: overview

Independent working reference. Product and feature names mentioned are trademarks of their respective owners. No investment advice.

The allocation decisions of this block determine the bulk of the investment result; stock selection and timing are downstream; discipline beats brilliance.

141 · Strategic vs. tactical asset allocation (SAA/TAA)

Definition: SAA = the long-term target structure derived from goals, horizon and risk capacity; TAA = a temporary deviation to exploit market opportunities (within ranges).

Use: SAA as the portfolio's constitution; TAA as regulated leeway (e.g. equity allocation 40-60% around a 50% target).

Opportunities: SAA empirically explains the lion's share of result dispersion; TAA can add value.

Risks: TAA often turns into market timing without rules.

Typical mistake: "Adjusting" the SAA in stress phases; that is mostly procyclical timing in strategy's costume.

142 · Diversification & concentration risks

Definition: Spreading across securities, sectors, countries, currencies and return sources; concentrations = dominating single risks.

Use: The only "free lunch"; the same return potential at lower risk.

Opportunities: Smoothing; protection against single-stock catastrophes.

Risks: Pseudo-diversification (many securities, one factor); dilution through over-diversification.

Typical mistake: Counting diversification in securities instead of risk factors; 40 tech stocks are one concentration.

143 · Rebalancing

Definition: Rule-based restoration of the weights to the target structure (calendar-based or on a range breach).

Use: Risk control plus a countercyclical system (sells what has risen, buys what has fallen).

Opportunities: Keeps the risk profile constant; an automatic discipline machine.

Risks: Transaction costs/taxes; a slight drag on return in long trends.

Typical mistake: Suspending rebalancing in a crisis; that is exactly when it works.

144 · Risk profiles & investment guidelines

Definition: Written fixing of goals, risk tolerance, permitted instruments, allocation ranges and responsibilities (investment policy statement).

Use: A constitution for all parties; the test standard for every single decision; the governance core in a family office.

Opportunities: Protection against ad hoc decisions and heir conflicts.

Risks: Outdated guidelines; corsets that are too tight.

Typical mistake: Writing guidelines and never reviewing them; an annual check is part of it.

145 · Core-satellite approach

Definition: A large, cost-efficient core (ETFs/index-like) plus small active satellites (themes, managers, niches).

Use: Cost control + targeted activity where it has a chance.

Opportunities: A clear cost structure; measurable satellite contributions.

Risks: Satellites proliferate; core and satellite overlap.

Typical mistake: Not measuring the satellites individually against the core.

146 · Duration management & bond laddering

Definition: Active choice of the portfolio duration (a rates view), or a ladder of evenly staggered maturities (rates-agnostic).

Use: The ladder for plannable liquidity and average rates; duration management for deliberate positioning.

Opportunities: The ladder eliminates the need for timing; management exploits rate cycles.

Risks: Management requires being right; the ladder forgoes optimization.

Typical mistake: Holding an implicit duration bet without knowing it as a decision; PORT shows the number.

147 · Hedging strategies (overview)

Definition: Reducing unwanted risks via derivatives (puts, futures, FX forwards), lowering allocations, or structure (buffers).

Use: Drawdown limitation ahead of defined events; permanent partial hedging for risk-averse mandates.

Opportunities: The target profile is shapeable.

Risks: Permanent hedging costs return (premiums, roll losses); timing illusion.

Typical mistake: Permanent full hedging; then the equity allocation is simply set too high.

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