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
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
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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