Your Guide to Portfolio Management

Your Guide to Portfolio Management

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Rashmi
Rashmi Karan
Manager - Content
Updated on Dec 11, 2023 14:47 IST

Investing can be daunting, especially for beginners. With so many options and potential risks, it's natural to feel unsure about how to proceed. This is where portfolio management comes in, playing a crucial role in your investment journey. In this blog, you will learn what portfolio management is, its types, its different stages, and factors influencing investment portfolio management.

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Content

What is Portfolio Management?

Portfolio management is the organization of an investor’s financial assets to reduce risk and maximize return. This involves making calculated investment decisions and using trading strategies.

Managing a portfolio means strategically monitoring our investments and ensuring they are aligned with our short- and long-term objectives.

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What Should You Know About Portfolio Management?

There are five rudimentary aspects that you consider to manage your portfolio effectively:

Risk tolerance: The higher the risk, the higher the return. If you take a lot of risks, you may win or lose a lot of money, but if you avoid risk altogether, you will not likely win or lose. The ideal portfolio should carefully balance risk depending on the investor’s tolerance for risk.

Performance Measurement: ​​Benchmarking and performance measurement of your investment allows you to track potential errors and learn your risk/reward ratio. While choosing a portfolio manager, consider their investment knowldge and style.

Asset Allocation: Varying assets have varying levels of stability. Selecting a mix of assets can reduce risk and maximize return by weighing volatility and investing accordingly.

Diversification: The volatility of markets and the risk involved in investing can be reduced by investing in various stocks, markets, and sectors. If a market crashes, you will not lose all your capital.

Restructuring: The market price of securities changes over time, affecting the return on your investments and their weighting in your portfolio. Regularly restructuring your portfolio ensures a balance between risk and return by returning the asset weight to its initial level.

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Types of Portfolio Management

1. Active Portfolio Management – In active portfolio management, portfolio managers actively buy and sell stocks, bonds, and other assets using quantitative or qualitative methods. They help to maximize profits for their clients by making strategies to outperform the stock market index. This can be achieved by buying undervalued securities and selling them at higher prices.

2. Passive Portfolio Management– The portfolio manager builds and manages a fixed portfolio of index funds, such as exchange-traded funds, conforming to current market conditions. However, these funds offer lower returns but are considered more consistent and profitable over time.

3. Discretionary Portfolio Management – Portfolio managers make financial decisions depending on their client’s goals and risk appetite to maximize earnings. It may also include paperwork and filing in addition to investment management.

Check out accounting interview questions

4. Non-Discretionary Portfolio Management – Portfolio managers are responsible for only advice on the best investment plans. Decision-making authority lies with investors entirely.

5. Mixed Portfolio Management: It is based on creating and managing a portfolio that combines active and passive management. In this way, in addition to being able to diversify in different assets, you also diversify with different investment strategies.

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Stages of Portfolio Management 

There is no fixed portfolio management strategy since not one size fits all. Every individual or company requires a unique investment portfolio that depends on a customized and strategic investment plan. Here are the different stages of portfolio management: 

Planning

Identify goals: The portfolio manager understands the client’s long- and short-term goals and clearly defines financial objectives.

Factor in limitations: Calculate associated risks, liquidity prospects, and expected returns from different asset combinations

Develop a robust strategy: Involves strategic and customized asset allocation based on investment goals and market behaviour.

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Execution  

Invest in profitable revenues: Thoroughly assess the securities’ fundamentals, liquidity, and credibility and invest in the selected portfolio.

Minimize risks: Diversifying the investment mix based on budget, timeline, and financial goals.

Feedback

Evaluate efficiency: Monitor and analyze the portfolio’s ratio of risk to return to determine its effectiveness.

Rebalance the composition: Revise the portfolio based on current market conditions to maximize earnings.

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Factors Influencing Investment Portfolio Management

To manage your portfolio, you must consider six factors directly related to our investor profile. These factors are:

Age

it is essential to consider our age since a young person can take more risks than someone close to retirement age.

Personal and professional situation

Invest decisions must be made by assessing your current and future situation.

For example, a person living alone and without a mortgage can afford to invest in riskier and more profitable assets. On the other hand, a person with a family and a mortgage will have to assess lower-risk investment options.

Risk aversion/tolerance

When investing, you must be clear about your level of risk tolerance. If your tolerance level is relatively low, you should opt for a less risky investment model, and conversely, if you are more risk tolerant, you can opt for the riskiest assets.

Investment horizon

It refers to the time when you will need the money. Before making any investment decision, you must consider the time horizon. For example, if you know you will need the money in less than a year, you should look for an investment you can recover before completing this. This is a critical point to keep in mind.

The comfort of investment

Some investment strategies, such as active management, require much more dedication than others. That is why you should assess whether you are willing to investigate the companies or products you want to invest in or prefer to invest using a less demanding strategy.

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Diversification

Whatever profile you have, you should create a portfolio that contains several assets with different characteristics. This way, you get a diversified portfolio and can minimize the risk of default (the most extreme risk with which you can suffer more significant losses). That is why you should assess which assets you feel most comfortable with when diversifying your portfolio (stocks, ETFs, investment funds, real estate assets, raw materials, etc.).

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Conclusion

Effective portfolio management allows investors to develop the best investment plan matching their income, age, and risk-taking capability, making it essential. With professional investment portfolio management, investors can reduce their risks effectively and avail customized solutions against their investment-oriented problems. It is, thus, one of the inherent parts of undertaking any investment venture. 

FAQs - Portfolio Management

What is diversification, and why is it important in portfolio management?

Diversification involves spreading investments across different asset classes and securities to reduce risk. It helps protect a portfolio from the poor performance of a single asset or asset class.

How do I assess my risk tolerance for portfolio management?

Assessing risk tolerance involves considering factors such as investment goals, time horizon, financial situation, and willingness to accept volatility. It helps determine the appropriate level of risk in a portfolio.

What are the different investment strategies in portfolio management?

Investment strategies can include passive strategies (e.g., index investing), active strategies (e.g., stock picking and market timing), value investing, growth investing, income investing, and more.

How do I monitor and evaluate the performance of my investment portfolio?

Portfolio performance can be evaluated by comparing its returns to benchmark indices, assessing risk-adjusted returns, and reviewing the portfolio's alignment with your financial goals. Regular monitoring and rebalancing are essential.

What are some common mistakes to avoid in portfolio management?

Common mistakes in portfolio management include not diversifying adequately, overtrading, reacting to short-term market fluctuations, neglecting to rebalance, and not considering tax implications. It's important to have a well-thought-out investment strategy and stick to it.

About the Author
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Rashmi Karan
Manager - Content

Rashmi is a postgraduate in Biotechnology with a flair for research-oriented work and has an experience of over 13 years in content creation and social media handling. She has a diversified writing portfolio and aim... Read Full Bio

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