Portfolio Management

By ADAM HAYES
 Reviewed By GORDON SCOTT 
 Updated Feb 27, 2020
What Is Portfolio Management?
Portfolio management is the art and science of selecting and overseeing a group of investments
that meet the long-term financial objectives and risk tolerance of a client, a company, or an
institution.

Portfolio management requires the ability to weigh strengths and weaknesses, opportunities and
threats across the full spectrum of investments. The choices involve trade-offs, from debt versus
equity to domestic versus international and growth versus safety.

Understanding Portfolio Management

Professional licensed portfolio managers work on behalf of clients, while individuals may choose
to build and manage their own portfolios. In either case, the portfolio manager's ultimate goal is
to maximize the investments' expected return within an appropriate level of risk exposure.

Portfolio management may be either passive or active in nature.

 Passive management is a set-it-and-forget-it long-term strategy. It may involve investing

in one or more exchange-traded (ETF) index funds. This is commonly referred to as
indexing or index investing. Those who build Indexed portfolios may use
modern portfolio theory (MPT) to help optimize the mix.
 Active management involves attempting to beat the performance of an index by actively
buying and selling individual stocks and other assets. Closed-end funds are generally
actively managed. Active managers may use any of a wide range of quantitative or
qualitative models to aid in their evaluations of potential investments.

KEY TAKEAWAYS

 Portfolio management involves building and overseeing a selection of investments that

will meet the long-term financial goals and risk tolerance of an investor.
 Active portfolio management requires strategically buying and selling stocks and other
assets in an effort to beat the broader market.
 Passive portfolio management seeks to match the returns of the market by mimicking the
makeup of a particular index or indexes.
Key Elements of Portfolio Management
Asset Allocation
The key to effective portfolio management is the long-term mix of assets. Generally, that means
stocks, bonds, and "cash" such as certificates of deposit. There are others, often referred to as
alternative investments, such as real estate, commodities, and derivatives.
Asset allocation is based on the understanding that different types of assets do not move in
concert, and some are more volatile than others. A mix of assets provides balance and protects
against risk.

 
Rebalancing captures gains and opens new opportunities while keeping the portfolio in line with
its original risk/return profile.

Investors with a more aggressive profile weight their portfolios toward more volatile investments
such as growth stocks. Investors with a conservative profile weight their portfolios toward stabler
investments such as bonds and blue-chip stocks.

Diversification
The only certainty in investing is that it is impossible to consistently predict winners and losers.
The prudent approach is to create a basket of investments that provides broad exposure within an
asset class.

Diversification is spreading risk and reward within an asset class. Because it is difficult to know
which subset of an asset class or sector is likely to outperform another, diversification seeks to
capture the returns of all of the sectors over time while reducing volatility at any given time.

Real diversification is made across various classes of securities, sectors of the economy, and
geographical regions.

Rebalancing
Rebalancing is used to return a portfolio to its original target allocation at regular intervals,
usually annually. This is done to reinstate the original asset mix when the movements of the
markets force it out of kilter.

For example, a portfolio that starts out with a 70% equity and 30% fixed-income allocation
could, after an extended market rally, shift to an 80/20 allocation. The investor has made a good
profit, but the portfolio now has more risk than the investor can tolerate.

Rebalancing generally involves selling high-priced securities and putting that money to work in
lower-priced and out-of-favor securities.

The annual exercise of rebalancing allows the investor to capture gains and expand the
opportunity for growth in high potential sectors while keeping the portfolio aligned with the
original risk/return profile.

Active Portfolio Management

Investors who implement an active management approach use fund managers or brokers to buy
and sell stocks in an attempt to outperform a specific index, such as the Standard & Poor's
500 Index or the Russell 1000 Index.
An actively managed investment fund has an individual portfolio manager, co-managers, or a
team of managers actively making investment decisions for the fund. The success of an actively
managed fund depends on a combination of in-depth research, market forecasting, and the
expertise of the portfolio manager or management team.

Portfolio managers engaged in active investing pay close attention to market trends, shifts in the
economy, changes to the political landscape, and news that affects companies. This data is used
to time the purchase or sale of investments in an effort to take advantage of irregularities. Active
managers claim that these processes will boost the potential for returns higher than those
achieved by simply mimicking the holdings on a particular index.

Trying to beat the market inevitably involves additional market risk. Indexing eliminates this
particular risk, as there is no possibility of human error in terms of stock selection. Index funds
are also traded less frequently, which means that they incur lower expense ratios and are more
tax-efficient than actively managed funds.

Passive Portfolio Management

Passive portfolio management, also referred to as index fund management, aims to duplicate the
return of a particular market index or benchmark. Managers buy the same stocks that are listed
on the index, using the same weighting that they represent in the index.

A passive strategy portfolio can be structured as an exchange-traded fund (ETF), a mutual fund,
or a unit investment trust. Index funds are branded as passively managed because each has a
portfolio manager whose job is to replicate the index rather than select the assets purchased or
sold.

The management fees assessed on passive portfolios or funds are typically far lower than active
management strategies.

SPONSORED

Get 15% welcome bonus up to $500

Trade forex and CFDs on stock indices, commodities, stocks, metals and energies with a licensed
and regulated broker. For all clients who open their first real account, XM offers a 15% welcome
bonus up to $500 to test the XM products and services without any initial deposit needed. Learn
more about how you can trade over 1000 instruments on the XM MT4 and MT5 platforms from
your PC and Mac, or from a variety of mobile devices.
Portfolio Management - Meaning and
Important Concepts
It is essential for individuals to invest wisely for the rainy days and to make their future secure.

What is a Portfolio ?
A portfolio refers to a collection of investment tools such as stocks, shares, mutual funds, bonds, cash
and so on depending on the investor’s income, budget and convenient time frame.

Following are the two types of Portfolio:

1. Market Portfolio
2. Zero Investment Portfolio

What is Portfolio Management ?

The art of selecting the right investment policy for the individuals in terms of minimum risk and
maximum return is called as portfolio management.

Portfolio management refers to managing an individual’s investments in the form of bonds, shares, cash,
mutual funds etc so that he earns the maximum profits within the stipulated time frame.

Portfolio management refers to managing money of an individual under the expert guidance of portfolio
managers.

In a layman’s language, the art of managing an individual’s investment is called as portfolio management.

Need for Portfolio Management

Portfolio management presents the best investment plan to the individuals as per their income, budget,
age and ability to undertake risks.

Portfolio management minimizes the risks involved in investing and also increases the chance of
making profits.

Portfolio managers understand the client’s financial needs and suggest the best and unique investment
policy for them with minimum risks involved.

Portfolio management enables the portfolio managers to provide customized investment solutions to
clients as per their needs and requirements.

Types of Portfolio Management

Portfolio Management is further of the following types:

 Active Portfolio Management: As the name suggests, in an active portfolio management

service, the portfolio managers are actively involved in buying and selling of securities to ensure
maximum profits to individuals.
  Passive Portfolio Management: In a passive portfolio management, the portfolio manager deals
with a fixed portfolio designed to match the current market scenario.
 Discretionary Portfolio management services: In Discretionary portfolio management
services, an individual authorizes a portfolio manager to take care of his financial needs on his
behalf. The individual issues money to the portfolio manager who in turn takes care of all his
investment needs, paper work, documentation, filing and so on. In discretionary portfolio
management, the portfolio manager has full rights to take decisions on his client’s behalf.
 Non-Discretionary Portfolio management services: In non discretionary portfolio management
services, the portfolio manager can merely advise the client what is good and bad for him but the
client reserves full right to take his own decisions.

Who is a Portfolio Manager ?

An individual who understands the client’s financial needs and designs a suitable investment plan as per
his income and risk taking abilities is called a portfolio manager. A portfolio manager is one who invests
on behalf of the client.

A portfolio manager counsels the clients and advises him the best possible investment plan which would
guarantee maximum returns to the individual.

A portfolio manager must understand the client’s financial goals and objectives and offer a tailor made
investment solution to him. No two clients can have the same financial needs.

Portfolio

A portfolio is a collection of projects and/or programmes used to structure and manage

investments at an organisational or functional level to optimise strategic benefits or
operational efficiency. They can be managed at an organisational or functional level.

Where projects and programmes are focused on deployment of outputs, and outcomes
and benefits, respectively, portfolios exist as coordinating structures to support
deployment by ensuring the optimal prioritisation of resources to align with strategic
intent and achieve best value

To shape the portfolio, the sponsor and portfolio manager seek out visibility of plans of
the constituent projects and programmes agree how to reshape those constituent parts
depending on:

 The organisation’s ability to resource the whole portfolio.

 Any changes to strategic direction or pace of strategic implementation.

In a strategic portfolio, governance may be aligned entirely with corporate governance.

Where this is not the case, it is vital to establish clear understanding and buy-in to the
portfolio prioritisation process from the executive team. In a portfolio, it is normal for
sponsors of projects, to be required to sacrifice their project priorities for the benefit of
the wider portfolio.

Portfolio plan

A portfolio plan is a depiction in words and diagrams of what the portfolio comprises,
its major dependencies, expected timescales and major deliverables, defining how the
portfolio will be managed. Supporting analyses may include cost and benefit schedules,
key risks and major stakeholders.

Portfolio risks

Portfolio risks would typically cover those internal and external events that will impact
on the portfolio overall rather than any single project or programme. They may include
such things as resource availability, implementation capacity, investment constraints
and regulatory matters.
What Is Portfolio Management? 
Portfolio management entails managing a group of investments under an
overall umbrella called a portfolio. A portfolio can be comprised of one or two
different investment vehicles or a collection of various investments. These
investments may be held in one account or in several, for example, a
retirement account and a taxable investment account. 

Portfolio management is a process of choosing the appropriate mix of

investments to be held in the portfolio and the percentage allocation of those
investments. Asset classes could include a mix of stocks, bonds and cash.
These might be held in some combination of individual stocks and bonds, or
via mutual funds or ETFs. Additionally, the portfolio might include alternative
investments such as real estate, private equity or precious metals. 

What Are the Objectives of Portfolio

Management?
The goal of portfolio management is to manage this collection of investments
in a fashion that is consistent with the investor's goals, their time horizon for
needing the money and their tolerance for downside risk in their investments. 

Portfolio management should dovetail with the investor's overall financial

objectives. These could include saving for retirement, for the education of the
investor's children or saving for a goal like buying a home. Often an investor
will have multiple financial objectives that may be tied to their investments. 

SPECIAL REPORT: Download Jim Cramer's 25 Rules for Investing

Whitepaper and become a smarter investor.
What Are the Key Elements of
Portfolio Management?
Some key elements of portfolio management include: 

Diversification 
Diversification refers to having a mix of investments that are not all highly
correlated to one another. The reason for having investments with a low
correlation to other holdings in the portfolio is to try to ensure that the entire
portfolio doesn't suffer a large loss whenever the stock market, or a certain
sector, moves downward. 

For example, stocks and bonds have a low and some cases a negative
correlation to one another. This means that the market and economic factors
that cause price movements in stocks will have little or no impact on the price
movement in bonds. Alternative assets such as real estate, gold, hedge
funds, private equity, currencies, futures, commodities and others can be used
to diversify a portfolio away from more traditional asset classes like stocks and
bonds and well. 

Asset allocation 
Asset allocation refers to how an investor divides up the eggs in their
investment basket, so to speak. Proper asset allocation is a key element in
portfolio management. Asset allocation is about risk management. The mix of
assets in a portfolio can help reduce risk in line with the risk tolerance of the
investor. 

Over the years, several studies have pegged asset allocation as the key
determinant of both the return of a portfolio and the volatility of that portfolio. 

Rebalancing 
Asset allocation is a good start, but a key part of portfolio management is
rebalancing the portfolio periodically back to the target asset allocation. Over
time the actual performance of investment holdings in the various asset
classes within the portfolio will perform at different levels relative to each
other. Perhaps small cap stocks will lead the pack for a couple of quarters, but
then international stocks will experience a period of relative outperformance. 

Over time differing returns will cause the asset allocation to deviate from the
investor's target allocation. (For example, if you originally placed 10% of your
portfolio in small cap stocks, over time the holding might have grown to
become 15% of your portfolio.) This can cause the portfolio to assume more
or less risk than desired. 

Periodically the portfolio should be rebalanced back to the target allocation.

This can be done by buying and selling holdings as needed. It can also be
done by using new money added to the portfolio if applicable. 

Asset Location 
If an investor's portfolio includes investments in both tax-deferred (or tax-free
in the case of a Roth account) retirement accounts and in taxable accounts,
asset location should be a consideration. Asset location refers to which types
of assets are held in which accounts. This is a tax-driven issue. 

Long-term capital gains taxes as well as those on qualified dividend payments

are often less for many investors than taxes on ordinary income from sources
including interest. Investments held for more than a year qualify for
preferential long-term capital gains rates on any gains from the sales of these
investments. These factors may favor holding more equity related investments
in taxable accounts with a heavier concentration of interest generating
investments, such as bonds and other fixed income vehicles, in tax-deferred
accounts. 

The concept of asset location should be integrated with an investor's asset

allocation as part of the portfolio management process. 

Why Is Portfolio Management

Important?
Investing is not a set-it-and-forget-it proposition. Portfolio management doesn't
mean watching and monitoring the portfolio constantly, but it does mean
monitoring things on a regular, consistent basis. 

Investor circumstances can change. Their goals and objectives can change
with the passage of time and life changes. These changes might call for a
portfolio adjustment. 

Individual holdings might need to be replaced from time to time. An actively

managed mutual fund might undergo a change in the fund's management.
This might lead the portfolio manager to make a change to another fund
holding. 

A portfolio approach to investing is important as well. Some investors simply

accumulate a number of individual holdings with little thought as to how all of
their various investments work together. This can lead to being over-allocated
in a single area which can expose the investor to more risk than they might
realize they are assuming. 

Key Takeaways
Investors are wise to take a portfolio management approach to their
investments, whether they do this themselves or hire professional help. 

A portfolio-focused investment approach blends the right mix of investments

to help investors fund their financial goals, while taking their time horizon to
meet those goals and their risk tolerance into account. A well-managed
portfolio will provide investors with the diversification needed to help achieve
their investment goals and is a part of an overall financial plan.
 Activities Involved in Portfolio Management
 Selection of securities in which the amount is to be invested.
 Creation of appropriate portfolio, with the securities chosen for investment.
 Making decision regarding the proportion of various securities in the
portfolio, to make it an ideal portfolio for the concerned investor.
These activities aim at constructing an optimal portfolio of investment, that is
compatible with the risk involved in it.

Process of Portfolio Management

1. Security Analysis: It is the first stage of portfolio creation process, which
involves assessing the risk and return factors of individual securities, along with
their correlation.
2. Portfolio Analysis: After determining the securities for investment and the
risk involved, a number of portfolios can be created out of them, which are called
as feasible portfolios.
3. Portfolio Selection: Out of all the feasible portfolios, the optimal
portfolio, that matches the risk appetite, is selected.
4. Portfolio Revision: Once the optimal portfolio is selected, the portfolio
manager, keeps a close watch on the portfolio, to make sure that it remains
optimal in the coming time, in order to earn good returns.
5. Portfolio Evaluation: In this phase, the performance of the portfolio is
assessed over the stipulated period, concerning the quantitative measurement of
the return obtained and risk involved in the portfolio, for the whole term of the
investment.

The portfolio management services are provided by the financial companies,

banks, hedge funds and money managers.