Portfolio Management: Learning the Basics

Having learned the investment terms needed to get acquainted in the world of investing that could help with portfolio management, now might be the good time to ask this question. What exactly is portfolio management?
Portfolio management, at its core, is the art and science of arranging and handling various investments that would match specific investment goals.

It offers the best investment plan to individuals in terms of their income, budget, age, and ability to undertake risks.

Portfolio management also reduces the risks involved in investing and raises the odds of generating profits.

Two Types of Portfolio Management

Passive Management

Passive management is for investors willing to accept market returns. An example of this is by using a fixed asset allocation with a portfolio consisting of index funds.

In this type of strategy, a portfolio manager deals with a portfolio that goes with the current market index, which is called as indexing or index investing.

Active Management

Active Management is a portfolio management involving a single manager, co-managers or even a group of managers.

The portfolio manager engaged in this practice tries to meet investment goals by taking active decisions on asset allocation and stock selection to generate returns.

Key Factors of Portfolio Management

Asset Allocation

Asset allocation is basically a variety of stocks, bonds, and cash in a portfolio. It is a vital element to successfully managing a portfolio.

Asset allocation aims to get the most out of the risk or return profile of an investor by investing in 
assets with low connection to each other.

It is based on knowing that assets do not move as one and that some are more volatile than others.


Diversification is the method of allocating capital among various financial instruments, businesses, and other categories to minimize risk or volatility.

Identifying which subset of an asset class or segment is likely to do better than the other is difficult to do. Through diversification, it ultimately secures the returns of all segments, but with lower volatility at any point in time.

A common way to diversify is by putting together a basket of investments that presents huge exposure within an asset class.


Rebalancing is the need for investors to adjust their holdings. It is an extremely crucial technique as it helps maintain the established level of asset allocation.

Investors’ holdings can be realigned by purchasing or selling specific stocks, funds, or other securities in a portfolio every so often.

Rebalancing from time to time could also diminish their exposure to risk on their target asset allocation.

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