What Is Portfolio Management and Why Is It Important? (2024)

November 2, 2017

CATEGORY

November 2, 2017

Portfolio management involves selecting and managing an investment policy that minimizes risk and maximizes return on investments. There is an art, and a science, when it comes to making decisions about investment mix and policy, matching investments to objectives, asset allocation and balancing risk against performance.

A portfolio manager's job is to create a portfolio that meets the specific goals and objectives of the investor. In order to do this, the manager must first understand the investor's investment objectives. Once these are understood, the manager can then select the assets that will be included in the portfolio.

A professional portfolio manager can provide you with a number of important services, such as:

• Analyzing your specific financial situation and goals.
• Determining an asset allocation strategy that is tailored to your unique circ*mstances.
• Regularly monitoring and rebalancing your portfolio according to your goals.
• Providing expert guidance and advice during periods of market uncertainty.

A good portfolio manager will understand all of these factors and more, in order to make sound decisions about where to invest and how to keep the portfolio balanced. A portfolio manager may work with individual investors or with institutions.

Institutional investors include pension funds, endowments, foundations, and other large organizations that invest money on behalf of their members or beneficiaries. These investors generally have a long-term investment horizon and are more interested in preserving capital than in achieving high returns.

Individual investors, on the other hand, may have a shorter time frame and be more concerned with making a profit on their investments. They may also be willing to take on more risk in order to achieve higher returns.

There are many complexities in portfolio management and portfolio management for retirement investing, which is why many Americans turn toward expert financial advisors to help them navigate the tricky waters of investing and the financial marketplace. Read below to educate yourself on the basics of portfolio management services and the need and importance of portfolio management strategy for financial planning throughout life.

What Are Typical Portfolio Management Investments and Services?

Portfolio management involves managing an individual’s investments in many forms, including the following:

• Bonds
• Stocks
• Shares
• Cash
• Mutual Funds
• Exchanged-Traded Funds
• Closed Funds

Expert portfolio management services entails determining marketplace strengths, weaknesses, opportunities and threats when it comes to the following:

Debt versus equity – There is always risk when investing and that risk comes down to the marketplace being either:

• Not in your favor – The marketplace is unpredictable and when this sometimes yields financial loss.
• In your favor – When the economy is doing well or your particular investments are in stock/businesses thriving, which yields return on investments.

Domestic versus international – Domestic and international markets vary greatly and have different investment strategies as the global economy fluctuates from the U.S. economy. The economy is increasingly global, which is why asset allocation and diversification can be important.

Growth versus safety – Riskier investments can mean faster growth, but it’s also sometimes to have a conservative portfolio for stability reasons.

Portfolio Management Is Not ‘One-Size-Fits-All’

Every individual has a unique investment portfolio and requires a customized investment plan. This means that the best investment plan for one person is completely different for someone else. For example, there is a different strategy or investment plan for each individual based on their income, budget, age and risk ability.

There are also many considerations per individual and household, which is why portfolio managers need to provide customized investment solutions to clients based on each client’s unique needs and requirements. For example, someone who is in his or her 20s will have a completely different investment portfolio plan than someone who is planning to retire in ten years as variables such as time, inflation and risk need to be measured differently for each person’s situation.

Another important aspect to consider when building an investment portfolio is a client’s risk tolerance. Some individuals are comfortable with a higher risk and potential for loss while others want a more conservative approach with a lower chance of seeing their investments drop in value. A client’s age, stage in life and investment goals will all play a role in how much risk they are willing to take on.

What Are The Fundamentals of Portfolio Management?

There is a delicate balance of key elements when it comes to expert portfolio management. Here are the basics:

Asset Allocation

A long-term mix of assets desired for an effective financial portfolio. Asset allocation is based on the concept that different types of assets have different marketplace performance. Asset allocations seeks to optimize the risk versus return profile of an investor by investing in a mix of assets that have low correlation to each other.

• Investors with a more aggressive profile can weight their portfolio toward more volatile investments.
• Investors with a more conservative profile can weight their portfolio toward more stable investments.

Diversification

The spreading of risk and reward within an asset class. A certainty in investing is that it’s impossible to consistently predict the winners and losers, which is why it’s imperative to have a mix, or diversified, portfolio.

• Diversification seeks to capture the returns of all the sectors over time, but with less volatility at any one time.
• Diversification takes place across different classes of securities, sectors of the economy and geographical regions.

Rebalancing

Rebalancing is used to return a portfolio to its original target allocation at annual intervals. It’s important for retaining the asset mix that best reflects an investor’s risk/return profile. If rebalancing isn’t done, the movements of the markets could expose the portfolio to greater risk or reduced return opportunities.

• Portfolio rebalancing typically happens annually and enables investors to capture gains and expand their opportunity for growth in high potential sectors while keeping a portfolio aligned with the desired risk/return profile.

Consider Hiring Professional Portfolio Management Services

If you are looking to retire within the near future, there is no time like the present to consider hiring a professional to manage your financial portfolio. Savvy financial and retirement planning, and taking measures to prevent financial mistakes, will help you develop a financial portfolio you will be not only be proud of; but will also greatly influence your quality of life and financial success.

Maximizing return with the marketplace’s appetite for risk can be complicated – which is why many seniors are turning toward professional portfolio management services and financial advisors to help them make their financial story one they can be proud of for years to come. Working with a professional portfolio manager is one of the smartest things you can do to ensure your financial success. If you are looking to take your financial future into your own hands, contact a portfolio management firm today.