Study guide
10.2 Portfolio Management Techniques
Series 65 Uniform Investment Adviser Law
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1 Introduction
About the Series 65 How to Use This Guide
2 Chapter 1: Economic Factors & Business Cycles
1.1 Business Cycles 1.2 Monetary Policy 1.3 Fiscal Policy 1.4 Inflation & Deflation 1.5 Interest Rates & Yield Curves 1.6 Global Economic Factors
3 Chapter 2: Financial Reporting & Analytical Methods
2.1 Financial Statements Overview 2.2 Accounting Fundamentals 2.3 SEC Filings & Annual Reports 2.4 Financial Ratios 2.5 Time Value of Money 2.6 IRR and NPV 2.7 Descriptive Statistics
4 Chapter 3: Types of Risk
3.1 Systematic (Market) Risk 3.2 Unsystematic (Company-Specific) Risk 3.3 Interest Rate & Reinvestment Risk 3.4 Inflation & Currency Risk 3.5 Liquidity Risk & Opportunity Cost 3.6 Risk Measurement & Portfolio Theory
5 Chapter 4: Cash Equivalents & Fixed Income Securities
4.1 Cash & Cash Equivalents 4.2 Treasury Securities 4.3 Agency Securities 4.4 Corporate Bonds 4.5 Municipal Bonds 4.6 Bond Pricing & Yields
6 Chapter 5: Equity Securities
5.1 Common Stock 5.2 Preferred Stock 5.3 Shareholder Rights & Corporate Actions 5.4 Equity Valuation Methods 5.5 ADRs, REITs & Other Equity Securities
7 Chapter 6: Pooled Investments
6.1 Mutual Funds 6.2 Mutual Fund Costs & Fees 6.3 Exchange-Traded Funds (ETFs) 6.4 Closed-End Funds & UITs 6.5 Hedge Funds & Private Equity
8 Chapter 7: Derivatives, Alternative Investments & Insurance Products
7.1 Options Basics 7.2 Options Strategies 7.3 Alternative Investments 7.4 Annuities 7.5 Life Insurance Products
9 Chapter 8: Client Types & Profiles
8.1 Individual Clients 8.2 Business Entity Clients 8.3 Trusts & Estates 8.4 Accredited & Qualified Investors 8.5 Suitability & Know Your Customer
10 Chapter 9: Portfolio Theory & Capital Markets
9.1 Modern Portfolio Theory 9.2 Capital Asset Pricing Model (CAPM) 9.3 Efficient Market Hypothesis 9.4 Risk & Performance Measures 9.5 Asset Allocation
11 Chapter 10: Portfolio Management Strategies
10.1 Investment Styles 10.2 Portfolio Management Techniques 10.3 Fixed Income Strategies 10.4 Return Calculations
12 Chapter 11: Tax Considerations & Retirement Planning
11.1 Capital Gains & Investment Taxes 11.2 Retirement Plans Overview 11.3 Individual Retirement Accounts (IRAs) 11.4 Education Savings Plans 11.5 Distributions & RMDs
13 Chapter 12: ERISA, Special Accounts & Performance Measures
12.1 ERISA Requirements 12.2 Special Account Types 12.3 Performance Measures & Reporting 12.4 QDROs & Special Situations
14 Chapter 13: Regulation of Investment Advisers
13.1 Investment Advisers Act of 1940 13.2 Registration Requirements 13.3 Recordkeeping Requirements 13.4 Custody Requirements 13.5 Exempt Reporting Advisers
15 Chapter 14: Regulation of Investment Adviser Representatives
14.1 IAR Definition & Requirements 14.2 Registration & Post-Registration 14.3 IARs of Federal Covered Advisers
16 Chapter 15: Regulation of Broker-Dealers & Agents
15.1 Broker-Dealer Definition 15.2 Agent Registration 15.3 Regulation Best Interest
17 Chapter 16: Securities Registration & Exemptions
16.1 Uniform Securities Act 16.2 Securities Registration Methods 16.3 Exempt Securities 16.4 Exempt Transactions
18 Chapter 17: Communications & Client Relationships
17.1 Advertising Rules 17.2 Social Media & Electronic Communications 17.3 Client Agreements & Disclosure 17.4 Proxy Voting & Other Obligations
19 Chapter 18: Ethics & Fiduciary Obligations
18.1 Fiduciary Duties 18.2 Prohibited Practices 18.3 Senior & Vulnerable Adult Protection 18.4 AML & Compliance Programs
10.2 Portfolio Management Techniques
Key Takeaways Explain This Topic AI
Dollar-cost averaging invests fixed dollars and buys more shares when prices fall.
Lump-sum investing often outperforms over long horizons.
DCA reduces timing risk and investor emotion.
Sector rotation shifts exposure with the business cycle.
Core-satellite blends passive core with active satellites.
Buy-and-hold minimizes taxes and trading costs.
Last updated: December 2025
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
- Month Price Shares Purchased
- 1 $50 $500 / $50 = 10.0 shares
- 2 $40 $500 / $40 = 12.5 shares
- 3 $45 $500 / $45 = 11.1 shares
- 4 $55 $500 / $55 = 9.1 shares
- Total $2,000 42.7 shares
- Average Market Price : ($50 + $40 + $45 + $55) / 4 = $47.50 per share
- Your Average Cost : $2,000 / 42.7 = $46.84 per share
The investor's average cost ($46.84) is LOWER than the average market price ($47.50) because more shares were purchased when prices were low.
Benefits of Dollar-Cost Averaging
- Benefit Description
- Reduces timing risk Avoids investing all money at a market peak
- Removes emotion Systematic approach prevents panic selling/buying
- Lower average cost Buy more shares when prices are low
- Builds discipline Creates regular investing habit
- Accessible Works with any amount of money
- Limitations of Dollar-Cost Averaging
- Limitation Description
- May underperform lump sum In rising markets, earlier investment wins
- Opportunity cost Cash waiting to invest earns less
- Transaction costs Multiple purchases may incur fees
- No guarantee Doesn't protect against losses
- 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
- Business Cycle Phase Favored Sectors Rationale
- Early Expansion Financials, Consumer Discretionary Credit demand rises, spending increases
- Mid Expansion Technology, Industrials Capital investment grows
- Late Expansion Energy, Materials Commodity demand peaks
- Recession Utilities, Consumer Staples, Healthcare Defensive, stable demand
- Recovery Financials, Consumer Discretionary Cycle begins again
- 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.
- Advantage Description
- Low costs Minimal trading expenses
- Tax efficient Fewer taxable events, long-term capital gains
- Simple No market timing required
- Time-tested Markets have risen over long periods
Philosophy : Time in the market beats timing the market.
- Core-Satellite Approach
- Structure
- Component Typical Allocation Strategy
- Core 60-80% Passive index funds (low cost)
- Satellite 20-40% Active strategies, specialized funds
- 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
- Type Description Example
- Asset Class Stocks, bonds, alternatives 60/30/10 allocation
- Sector Different industries Tech, healthcare, financials
- Geographic Different countries US, international, emerging
- Market Cap Different company sizes Large, mid, small cap
- Style Different investment approaches Growth and value
- 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.
- Feature Benefit
- Growing income Dividend increases beat inflation
- Quality signal Consistent raises indicate financial strength
- Compounding Reinvested dividends accelerate growth
- Lower volatility Dividend stocks often more stable
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
- DCA invests fixed dollars at regular intervals—buys more shares when prices are low
- Lump sum often outperforms DCA because markets generally rise
- DCA reduces timing risk and removes emotion from investing
- Sector rotation shifts allocations based on the business cycle
- Core-satellite combines low-cost passive core with active satellites
- Buy and hold minimizes costs and taxes for long-term investors