Those who are into investments are familiar with how portfolios work. In a nutshell, a “portfolio” refers to a compilation of a person’s financial assets. These assets may be either intangible (i.e. stocks, bonds) or tangible (i.e., real estate, gold).
All of these assets need to be managed effectively in order to be protected and to grow at the same time. That being said, this is exactly why portfolio management matters.
What is portfolio management?
Portfolio management is actually a game of strategy. The method of managing one’s portfolio would entirely depend on the person’s timeline, goals, and tolerance for risk.
While the entire process involves managing existing assets, it also includes the selection of other investments. These may include bonds, funds, and stocks. With proper portfolio management, individuals can carefully plan their investment strategy by deciding which assets to accumulate.
With that, portfolio management is undeniably crucial. It helps individuals manage their existing assets and also enables them to plot out how they can grow their wealth.
Types of Portfolio Management
Portfolio management can actually be done in a number of ways. Let’s take a look at each type.
Discretionary and Non-Discretionary
Discretionary and non-discretionary portfolio management are two types of portfolio handling systems. For discretionary portfolio management, the investor allows the portfolio manager to handle financial needs on behalf of the individual. These needs may include paperwork, filing, and documentation. The portfolio manager will also have the authority to make decisions on behalf of the investor.
In contrast to discretionary portfolio management, where the manager has authority, non-discretionary portfolio management only allows the manager to advise the investor. It is ultimately up to the investor to make the final call.
Active and Passive
Aside from the previous two, there is also active and passive portfolio management. Active portfolio managers have clear and active involvement when it comes to the buying and selling of certain assets and securities. Their involvement is there to ensure that the investor generates maximum returns.
In contrast to active portfolio managers, passive ones stick to a fixed design of the portfolio in order to keep up with the market situation. This type of portfolio management is done in order to mimic market returns over time.
All of these types of portfolio management have their advantages and disadvantages. In the end, it is up to the portfolio manager and investor to come to terms with the manager’s authority and involvement.
Key Considerations in Portfolio Management
As mentioned earlier, portfolio management involves managing existing assets and plotting out one’s investment track. In doing so, there are some things that individuals should consider as they manage their portfolio.
The term “diversification” may not be a stranger to those who have been delving into the financial realm. The entire concept of diversification is a way to minimize risks by diving into different areas.
Diversification simply refers to spreading assets—primarily cash—across various investment vehicles, geographies, industries, companies, or sizes. This way, if one investment sinks, the entire portfolio can still stay afloat.
Asset allocation largely goes hand in hand with diversification. This concept is primarily based on the reality that some assets are more volatile than others. Hence, mixing assets and investment vehicles can lead to balance and risk protection.
Deciding the amount of assets to allocate to a specific investment may largely depend on one’s risk tolerance. Those who invest aggressively may opt for more volatile options, such as equity stocks. On the other hand, conservative investors may opt for less risky vehicles, such as bonds.
Though a portfolio starts out with a specified allocation, things may fluctuate over time. Rebalancing is thus necessary to maintain the balance across various accounts. Over time, fluctuation may lead the portfolio down a different route than its original direction. Hence, rebalancing is done so that the portfolio will go back and stay true to the original target allocation.
While taxes may not be avoidable, there are still strategies to reduce them. These methods are done to lower the investor’s present or incoming taxes. Doing so is important because tax deductions can impact the returns of an investor. With proper portfolio management, investing can be done in a tax-efficient manner.
The Portfolio Management Process
Though portfolio management may not sound that difficult, it is easier to understand when it is broken down into steps. Here are the main steps to take when it comes to portfolio management:
Like every other endeavor, portfolio management should start with a thorough plan. In this stage, it is important to know the needs of the investors. The details to be laid out must include the following:
- Investment objectives (i.e., consistent returns, increased capital)
- Investment limitations (i.e., timeframe, liquidity)
- Potential risks and tolerance for risks
- Projected profits
- Planning out asset location based on goals and market behavior
- Portfolio management type
All of these details are important in order to come up with a strategy that is comprehensive and intentional.
Once the portfolio management plan is plotted out, the portfolio manager can proceed with executing the plan. Here are some steps that the assigned manager will take:
- Analyze and choose assets based on certain characteristics (i.e. liquidity, profitability).
- Proceed to invest in the chosen vehicle.
- Mix up and diversify the portfolio based on risk tolerance and other limitations
Basically, in this phase, the manager will simply execute the plan to manage and grow assets.
While the plan may initially appear comprehensive, only the results will tell if the plan was successful. Hence, managers will also monitor how the asset and the overall portfolio are faring.
In this stage, the portfolio manager shall keep track of and evaluate the overall performance (in terms of risk and reward) over a specific period in order to boost efficiency. The manager shall also restructure and rebalance the portfolio when necessary in order to optimize the entire portfolio.
There are still more nitty-gritty details when it comes to portfolio management, but these steps summarize the entire process.
Opt For Professional Portfolio Management Services
Especially for those who are not specialists when it comes to finance and investments, opting for professional portfolio management services is a good option. Peak Global Management Japan, for one, can help with this.
Peak Global Management can come up with a personalized portfolio management solution to handle the entire portfolio with discernment and the right expertise. This way, investors can rest assured that their portfolio is managed based on their goals, risk tolerance, and other determined factors.
Contact Peak Global Management Japan to learn how they can help you manage your portfolio.