What is Portfolio Management and Why is

it Good for Investment Planning

Portfolio management is a key tool for financial growth and is relevant to both
individual investors as well as organizations. Making the most of an investment
portfolio involves developing a focused strategy that can help gauge market risks
and maximize returns successfully. Investors benefit from assistance provided by
skilled professionals in managing their investment portfolio. Let’s dig deeper
into what is portfolio management and how it works.

What is Portfolio Management?

In simple terms, portfolio management is the process of choosing and managing a
set of investments to meet the specific financial goals of a company or an individual.
There is a science behind selecting the right investment mix for a client and perfectly
balancing the risk tolerance. Let’s understand this with some examples.

Examples of Portfolio Management

Let us say an individual is looking to explore multiple investment avenues such as
stocks, bonds, or funds. However, they only possess limited knowledge about the
investment market and know very little about the market forces that can influence
returns on these investments. In such situations, portfolio management plays a key
role as it can not only help enhance returns but also put the right financial strategies
into practice.

If this hypothetical investment corpus amounts to $1,000, a portfolio manager will

distribute it across different units like real estate, mutual funds, and shares, for
example, to enhance profitability. This division is generally based on the individual’s
financial goals and risk appetite.

How Does Portfolio Management Work

There is no one-size-fits-all approach when it comes to portfolio management. Every
individual or organization has a unique investment portfolio that requires a
customized and strategic investment plan. Now that you know what is portfolio
management, here is a breakdown of how it actually works:

Planning

 Identify clients goals: Understand clients needs, long- and short-term goals,
define clear financial objectives in terms of capital appreciation or stable
returns
  Factor in limitations: Calculate associated risks, liquidity prospects and
expected returns from different asset combinations
 Develop a strong strategy: Involves strategic and customized asset
allocation based on investment goals and market behavior

Execution

 Invest in profitable revenues: Making investments in the selected portfolio

of securities after thoroughly assessing their fundamentals, liquidity, and
credibility
 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’s composition based on
current market conditions to maximize earnings

Importance of Portfolio Management

Portfolio management is so much more than just picking profitable investments. It
also involves learning about the investor’s goals, timelines, budget and creating an
investment strategy that is well-diversified and yields high returns. Good portfolio
management can result in greater returns as it takes both long- and short-term
financing options over a given period of time into consideration. This enhances the
likelihood of efficient resource allocation and capital appreciation.

Most investments are far from being a one-and-done deal. They need to be tweaked
and rebalanced from time to time in order to maximize returns. This is also called
portfolio adjustment. For example, in case of mutual fund investments, fund
management may undergo some changes if it is actively managed. In such cases, a
portfolio manager can take charge and make the required changes to other fund
holdings. In this manner, portfolio management also helps monitor and evaluate
financial portfolios on a regular basis.

The Role of the Portfolio Manager

Since we have established what is portfolio management, let’s look at what a
portfolio manager does. A portfolio can have a variety of investments that are held in
a single account or across multiple accounts. This can be a retirement account or
even a taxable investment account. A portfolio manager helps make such decisions
with ease.

These are the main responsibilities of a portfolio manager:

  Inform the client about relevant investment tools
 Create and implement customized investment solutions
 Choose the optimal asset class based on investment goals
 Develop and manage financial portfolios
 Evaluate and monitor assets
 Measure performance and manage risk
 Rebalance the portfolio depending on market conditions

In simple terms, a portfolio manager is someone who essentially helps design and
implement the best financial investment plan that is well-diversified and yields high
returns.

Portfolio Management: Things to Keep in Mind

Now that you have a detailed understanding of what is portfolio management, it’s
time to find out what really goes into making portfolio management effective and
successful. Once you have the initial strategy in place, here are the key areas to
explore:

Asset Allocation

It refers to how your assets are divided across different types of investments. Risk
tolerance plays a crucial role here. A good portfolio manager will help customers
make informed investment choices taking aspects such as age, budget, and goals
into account and recommend the kind of risks they can take when investing.

Diversification

The best way to explain this concept is this: avoid putting all your eggs in one
basket. This ensures that even if a certain investment sinks, the entire portfolio does
not get affected. A good example of asset diversification is investing in funds that
offer different securities, which means more diversification as compared to a single
stock.

Rebalancing

It involves evaluating and adjusting the investment strategy as per market

fluctuations and main financial goals. Rebalancing is an important element of a good
portfolio management strategy.

Tax Considerations

Tax-efficient investing is incredibly important to ensure that a minimum amount of tax

is levied on the customers’ returns.
Portfolio Manager Career Path
The role of a portfolio manager is not an entry-level one and most professionals
begin their careers at an associate level as a financial analyst or junior analyst. They
typically contribute to the investment decision-making process by working on
securities or conducting research and analysis at a firm.

Portfolio Manager Skills

A good portfolio manager should primarily have these key skills – a good
understanding of investment processes and strategy, portfolio construction, risk
analysis and performance measurement, strategic decision-making, analytical
abilities and strong communication skills.

Portfolio Manager Job Description

A portfolio manager works closely with clients to translate financial objectives into
profitable investments that can yield returns. They work on creating impactful
investment strategies that match the client;s financial goals. They create reports on
investment performance, communicate with clients on asset diversification and
analyze risk management processes
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.

Some individuals do their own investment portfolio management. That

requires a basic understanding of the key elements of portfolio building
and maintenance that make for success, including asset allocation,
diversification, and rebalancing.

KEY TAKEAWAYS

 Investment portfolio management involves building and overseeing a

selection of assets such as stocks, bonds, and cash that 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 performance of the
broader market.
 Passive portfolio management seeks to match the returns of the
market by mimicking the makeup of an index or indexes.
 Investors can implement strategies to aggressively pursue profits,
conservatively attempt to preserve capital, or a blend of both.
 Portfolio management requires clear long-term goals, clarity from the
IRS on tax legislation changes, understanding of investor risk
tolerance, and a willingness to study investment options.

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 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.

Portfolio Management: Passive vs. Active

Portfolio management may be either passive or active.
Passive management is the 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 them
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.

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.

Portfolio Management: Discretionary vs. Non-

Discretionary
Another critical element of portfolio management is the concept
of discretionary and non-discretionary management. This portfolio
management approach dictates what a third-party may be allowed to do
relating to your portfolio.

A discretionary or non-discretionary management style only pertains to if

you have an independent broker managing your portfolio. If you only want
the broker to execute trades that you have explicitly approved, you must
opt for a non-discretionary investment account. The broker may advise on
strategy and suggest investment moves. However, without your approval,
the broker is simply an adviser that must follow your discretion.

On the other hand, some investors would prefer placing all of the decision-
making in the hands of their broker or financial manager. In these
situations, the financial adviser can buy or sell securities without the
approval of the investor. The adviser still has a fiduciary responsibility to
act in their client's best interest when managing their portfolio.

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 equivalents such as
certificates of deposit. There are others, often referred to as alternative
investments, such as real estate, commodities, derivatives, and
cryptocurrency.
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.

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 involves spreading the risk and reward of individual

securities within an asset class, or between asset classes. 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.

Tax-Efficiency

A potentially material aspect of portfolio management relates to how your

portfolio is shaped to minimize taxes in the long-term. This pertains to how
different retirement accounts are used, how long securities are held on for,
and which securities are held.

For example, consider how certain bonds may be tax-exempt. This means
that any dividends earned are not subject to taxes. On the other hand,
consider how the IRS had different rules relating to short-term or long-term
capital gains taxes. For individuals earning less than $41,675 in 2023, their
capital gains rate may be $0. On the other hand, a short-term capital gains
tax of 15% may apply if your income is above this IRS limit.

Common Portfolio Management Strategies

Every investor's specific situation is unique. Therefore, while some
investors may be risk-averse, others may be inclined to pursue the
greatest returns (while also incurring the greatest risk). Very broadly
speaking, there are several common portfolio management strategies an
investor can consider:

 Aggressive: An aggressive portfolio prioritizes maximizing the

potential earnings of the portfolio. Often invested in riskier industries
or unproven alternative assets, an investor may not care about
losses. Instead, the investor is looking for the "home run" investment
by striking it big with a single investment.
 Conservative: On the other hand, a conservative portfolio relates to
capital preservation. Extremely risk-adverse investors may adopt a
portfolio management strategy that minimizes growth but also
minimizes the risk of losses.
 Moderate: A moderate portfolio management strategy would simply
blend an aggressive and conservative approach. In an attempt to get
the best of both worlds, a moderate portfolio still invests heavily in
equities but also diversifies and may be more selective in what those
equities are.
 Income-Orientated: Often a consideration for older investors, some
folks who do not have income may rely on their portfolio to generate
income that can be used to live off of. Consider how a retiree no
longer has a stable paycheck. However, that retiree may no longer
be interested in generating wealth but instead of using their existing
wealth to live. This strategy priorities fixed-income securities or
equities that issue dividends.
 Tax-Efficient: As discussed above, investors may be inclined to
focus primarily on minimizing taxes, even at the expense of higher
returns. This may be especially important for high-earners who are in
the highest capital gains tax bracket. This may also be a priority for
young investors who have a very long way until retirement. By
 getting started with a Roth IRA, these investors may be able to grow
their portfolio over their entire life and face no federal taxes on
withdrawal when they retire.

Challenges of Portfolio Management

Regardless of the strategy chosen, portfolio management always faces
several hurdles that often cannot be eliminated entirely. Even if an investor
has a foolproof portfolio management strategy, investment portfolios are
subject to market fluctuations and volatility which can be unpredictable.
even the best management approach can lead to significant losses.

Though diversification is an important aspect of portfolio management, it

can also be challenging to achieve. Finding the right mix of asset classes
and investment products to balance risk and return requires a deep
understanding of the market and the individual investor's risk tolerance. It
may also be expensive to buy a wide range of securities to meet the
desired diversification.

To devise the best portfolio management strategy, an investor must first

know their risk tolerance, investment horizon, and return expectations.
This requires a clear short-term and long-term goal. Because life
circumstances can quickly and rapidly change, investors must be mindful
of how some strategies limit investment liquidity or flexibility. In addition,
the IRS may implement changes to tax legislation that may force changes
to your ultimate strategy.

Last, should an investor turn to a portfolio manager to manage their

investments, this will incur a management fee. The portfolio manager must
often meet specific regulatory reporting requirements, and the manager
may not have the same opinions or concerns about the market as you do.

What Are the Types of Portfolio Management?

Broadly speaking, there are only two types of portfolio management
strategies: passive investing and active investing. Passive management is
a set-it-and-forget-it long-term strategy. Often referred to as indexing or
index investing, it aims to duplicate the return of a particular market index
or benchmark and may involve investing in one or more exchange-traded
(ETF) index funds. 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.
What Is Asset Allocation?
Asset allocation involves spreading the investor's money among different
asset classes so that risks are reduced and opportunities are maximized.
Stocks, bonds, and cash are the three most common asset classes, but
others include real estate, commodities, currencies, and crypto. Within
each of these are sub-classes that play into a portfolios allocation. For
instance, how much weight should be given to domestic vs. foreign stocks
or bonds? How much to growth stocks vs. value stocks? And so on.

What Is Diversification?
Diversification involves owning assets and asset classes that have been
shown over time to move in opposite directions. When one asset class
performs poorly, other asset classes usually prosper. This provides a
cushion to your portfolio, offsetting losses. Moreover, financial
mathematics shows that proper diversification can increase a portfolio's
overall expected return while reducing its riskiness.

What Is the Objective of Portfolio Management?

The objective of portfolio management is to create and maintain a
personalized plan for investing over the long term in order to meet an
individual's key financial goals. This means selecting a mix of investments
that matches the person's responsibilities, objectives, and appetite for risk.
Further, it means reevaluating the actual performance of the portfolio over
time to make sure it is on track and to revise it as needed.

What Does an Investment Portfolio Manager Do?

An investment portfolio manager meets with a client one-on-one to get a
detailed picture of the person's current financial situation, long-term goals,
and tolerance for risk. From there, the portfolio manager can draw up a
proposal for how the client can meet their goals. If the client accepts the
plan, the portfolio can be created by buying the selected assets. The client
may start out by contributing a lump sum, or add to the portfolio's balance
periodically, or both. The portfolio manager takes responsibility for
monitoring the assets and making changes to the portfolio as needed, with
the approval of the client. Portfolio managers generally charge a fee for
their service that is based on the client's assets under management.

The Bottom Line

Anyone who wants to grow their money has choices to make. You can be
your own investment portfolio manager or you can hire a professional to do
it for you. You can choose a passive management strategy by putting your
money in index funds. Or, you can try to beat the markets by moving your
money more frequently from one asset to another.

In any case, you'll want to pay attention to the basics of portfolio

management: pick a mix of assets to lower your overall risk, diversify your
holdings to maximize your potential returns, and rebalance your portfolio
regularly to keep the mix right.