Portfolio Management is the science of supervising and monitoring the investments of an individual to reduce risks and make the most profit from the investment. Portfolio management can scale through the entire spectrum of an investment- the drawbacks, strengths, opportunities, and risks of an investment.
In simpler terms, portfolio management ensures that you make out more profits from your bonds, cash, stocks, and mutual funds. A person who manages other people’s portfolios is a portfolio manager and makes investment decisions for the individuals or firms.
Why Is Portfolio Management Important?
Portfolio Management is important for several reasons. Some of these reasons are as follows:
- Portfolio Management ensures investors and firms have good profits for any investments they embark on and also helps to reduce the risk involved in that investment.
- A portfolio manager is fully aware of the financial needs of their clients and so recommends the best appropriate investment for them.
- They present investment solutions tailored to meet with the demands of their clients to reduce risks.
- Portfolio Management proposes a favorable investment policy that best fits their clients regarding their age, budget, income, and their capacity to undertake risk.
- Portfolio Management helps firms and corporate bodies to diversify their portfolios. This means that they are at liberty to spread their borders and have more than one investment which will also help reduce risks.
What Is a Portfolio?
A portfolio is an array of financial investments. These investments include shares, stocks, commodities, bonds, mutual funds, cash and cash equivalents, exchange-traded funds, closed-end funds, and the likes.
A portfolio investment is largely based on an investor’s budget or income. Typically, we think just stocks, cash, and bonds are what make up a portfolio.
Even though that’s usually the case, there are possibilities that a portfolio could contain various assets such as private investments, real estate, and even arts.
What Is Portfolio Management’s Main Objective?
The main objective for portfolio managers is to maximize profits in the future by investing in sellable securities. These securities include bonds, stocks, commodities, and the rest.
With portfolio management, an investor can achieve his investment objectives and bring his risks to a minimum.
What Do Portfolio Managers Do?
A portfolio manager is a person who discerns the financial needs of his clients and drafts out an investment policy to suit their needs.
Here are a few things we could say a portfolio manager does:
- A counselor. He counsels his clients on what investment plan would be most profitable.
- Portfolio managers sometimes make investments for their clients.
- A portfolio manager understands the financial goals of their clients and offers a customized investment solution to the problem.
- A portfolio manager ensures that his clients are well informed about the various investment plans available in the market and the benefits attached to each plan.
What Are the Types of Portfolio Management?
Just one financial plan will not suit every investor. As such, different portfolio management plans are tailored to meet different clients’ investment needs and financial goals.
Let’s look further into the various types of portfolio management available:
Active management is the practice of actively buying and selling stocks, bonds, and other assets. Individuals involved in active management often engage in it to secure maximum profit.
Beyond securities, closed-end funds are also actively managed. Sometimes, active managers use qualitative and quantitative samples to analyze the possibility of a profitable investment.
Individuals who use this portfolio management system often use brokers or find managers to buy and sell stocks. An active management investment fund is best fit for individuals, or co-managers who are actively making investment decisions.
For an actively managed fund to be successful, there must be a blend of in-depth research with market forecasts and portfolio management skills.
Passive management is a long-term strategy that uses an existing design to match the existing market system. It involves a mutual fund or an exchange-traded index fund (ETF).
These index funds are often seen as passively managed because they are duplicated by a portfolio manager. The passive index is best for individuals or managers who would want to buy a stock and leave it for a while before selling.
Discretionary Management gives the portfolio manager the authority from an investor to have access or take care of their financial needs. The investor or individual gives the portfolio manager money to supervise all of their investment, documents, or paper work.
Here, the portfolio manager has the full privilege and a valid opinion regarding the finances of their client. Investors who are either busy or not fully aware of how to manage a portfolio make use of this system of management.
An advantage of portfolio management is that it gives an investor access to professional advice for all of their investment decisions. As such, decision-making becomes a lot easier for the investor.
Here, the portfolio manager has little or no rights to instruct their client on the right investment to make. Rather, the client makes the final investment decision.
The non-discretionary Management system provides you with access to a professional while you’re still in control of your decisions. The outcome of every investment will be primarily based on the investors’ decisions.
Types of Portfolios
Different types of portfolios endanger approaches to the portfolio management systems. They are:
An aggressive style of portfolio management makes profit by taking higher risks. Its strategy for obtaining profits that are higher than the average is by using capital appreciation as the main investment goal.
This strategy usually has an asset allocation with considerable weight in stocks and probably little or no allocation in cash and bonds. Also, this strategy is know to be more favorable for young adults with a smaller portfolio size.
Some other strategies that the aggressive portfolio uses are the high turnover strategy and allocation strategy. The turnover strategy searches for stocks that yield profits in a short time while the allocation strategy divides the cash into different stocks.
The lesser the stocks the more aggressive it gets. Here is an illustration:
Assume you have two portfolios that are A and B. Portfolio A having an asset allocation of 65% capitals, 20% income, and 15% commodities will be seen as an aggressive allocation.
This is because 80% of the assets are classified as capitals and commodities and 20% income. In comparison to portfolio B which has 2 asset allocations with 80% capitals and 20% commodities.
Portfolio B would be more aggressive because the lesser the asset allocation the more aggressive. In simpler terms, allocation can be seen as the share or portion of your assets allocated to a stock.
A defensive portfolio is another style of portfolio management. This provides constant earnings and dividends regardless of the market. There’s usually a demand for defensive portfolio investments and so investors often want to have a defensive stock as part of their investments.
Properly built companies such as Coca-Cola and Johnson & Johnson, are often seen as defensive stocks. These stocks offer considerable profits for long-term profits with lesser risks than other stocks.
Investors or individuals tend to safeguard their portfolios during exposure to defensive stocks.
The income portfolio mainly focuses on investments that generate finance from dividends or other forms of diversification to shareholders. A couple of income portfolio stocks suit the defense portfolio.
An income portfolio can be expected to yield an optimistic cash flow. Examples of an income portfolio are:
With all the various styles of portfolio available, the speculative style of portfolio management is usually regarded as the nearest to gambling. This is because it has more risks than any other portfolio management listed.
Speculative portfolios include stocks and initial public offering (IPOs) that are seen as the take-over targets. Upcoming firms creating a breakthrough product fall within this group as well.
This portfolio is the most flexible portfolio management available. To own a hybrid portfolio, you’ll need to diversify having investments in commodities, bonds, arts, and real estate.
This portfolio combines bonds and stocks in moderate proportions. It also enables you to diversify your assets which can be quite beneficial to investors.
This is because, over time, there has been quite a negative blend of fixed income securities and equities.
What Are the Key Steps in Portfolio Management?
There are four major steps in portfolio management. These steps will also guide you in creating a process that will develop your model. They are:
This is often the first. Portfolio Management focuses on the basic need of an individual or a firm as authorized by its executives.
This is done through analyzation of the metrics of interest, strategic concerns, and priority. Executive framing is the difference between creating an academic exercise and building a beneficial decision strategy.
After the executive management, the collection of data is ideally the next step. To create a portfolio model, you need to have perfect data.
And so, the best way to begin a portfolio analysis is to use the available data. A company usually uses this data to convey opinions.
However, there’s a possibility for an increase in the company’s data with time if need be.
Model & Analyze
After collecting the data, the next step would then be to analyze the model. You can hit a team of people to perform this function.
Immediately after the model is done and the analysis is complete, it’s important to synthesize the data available before sharing with executives. These steps, if followed properly, could bring out more analysis and decision-making factors for the investor.
Getting Help Managing Your Portfolio
The benefits of having a portfolio management account are immeasurable. But irrespective of the portfolio management system that you adopt, you still require the services of a financial advisor.
A financial advisor would help you embark on a favorable investment and ensure you make maximum profits out of that investment. Truthfully, you could never go wrong with the assistant of a skilled and well-informed financial advisor.
From the various types of portfolio management we’ve discussed earlier, you could go with whichever best suits you. The goal is for you to make profits and generate maximum returns from your investments.