Definition
Portfolio management is the art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance. This strategic practice involves choosing suitable investments and allocating the correct percentage of portfolio assets to each based on your goals, risk tolerance, and time horizon.
What is portfolio management?
Imagine if you were planning an ideal diet tailored to your health goals. Like combining different food groups in specific amounts to achieve the best health outcomes, portfolio management combines various types of investments (stocks, bonds, funds, ETFs, etc.) in particular proportions to achieve financial goals.
Suppose you’re a retiree with an investment portfolio reading this. In that case, you’ll likely have a portfolio with a healthy mix of bonds for steady income, blue-chip stocks or funds for growth, and some cash for emergencies. Having a portfolio ‘balanced’ in this way is widely seen as a likely way to ensure a comfortable retirement.
The goals of portfolio management
The primary goal of portfolio management, often undertaken with an IFA, is to maximise returns while minimising risk. It aims to grow your assets over time while ensuring that the level of risk taken aligns with your comfort level and investment objectives.
Your portfolio management goals may change over time (e.g., as you get closer to retirement). However, you may also have to balance long-term goals (having enough money for a happy and healthy retirement) with short-term planning, like paying for holidays or a new car.
Types of portfolio managers
A portfolio manager is a professional responsible for making investment decisions and carrying out investment strategies for a portfolio. They monitor the assets’ performance, making changes when necessary to align with the investment goals.
Portfolio managers come in different flavours, depending on how hands-on you want them to be with your investments:
- Independent Financial Advisors (IFAs): They’re like personal trainers for your finances, giving you one-on-one advice and helping you manage your investment mix.
- Discretionary managers: These are the set-it-and-forget-it types. You give them the green light, and they handle the nitty-gritty of buying and selling assets for you.
- Advisory managers: They’ll give you investment advice and only make moves when you say ‘yes’ – a collaborative approach to managing your portfolio.
- Private bankers: These cater to the well-off and offer VIP treatment in investment management as part of a broader wealth package.
- Robo-advisers: This tech-savvy option uses algorithms to manage your investments based on your risk comfort and goals.
- Institutional managers: These are the big-league players who handle hefty portfolios for pension funds and big organisations.
- Fund managers: They pool money from many investors to buy a collection of stocks or bonds, guiding the fund’s strategy to match its objectives.
Each kind serves the same basic purpose – to grow your investment pot – but they differ in how they interact with you and handle your investments.
Types of portfolio management
There are various approaches to managing a portfolio, including:
- Active management: Actively buying and selling assets to outperform the market.
- Passive management: Mimicking the market by investing in index funds or ETFs and not frequently trading.
- Discretionary management: Entrusting a portfolio manager with making all investment decisions.
- Execution-only or non-discretionary management: The investor makes the final decision on the advice given by the portfolio manager.
Asset allocation and diversification
A cornerstone of portfolio management is determining the proper asset allocation, which can involve spreading investments across different asset classes. It’s like not putting all your eggs in one basket. Instead, you spread them across several baskets. If one basket falls, you won’t lose all your eggs. Similarly, diversifying your investments across stocks, bonds, and other assets can protect your money from being overly affected by any single market event.
Risk management in portfolio management
Effective portfolio management involves assessing and managing the risks associated with each investment and the portfolio as a whole. This includes evaluating potential downside and making adjustments to protect the portfolio.
Conclusion
Portfolio management is crucial for anyone looking to build and maintain a solid financial future. It’s about making informed decisions, spreading risk, and staying focused on long-term objectives. With careful planning and regular review, effective portfolio management helps investors navigate through the ups and downs of the market to achieve their desired financial outcomes.
