Portfolio Management and its Impact on Return
Over the decades, financial professionals have long recognized the importance of managing investments to maximize portfolio performance. This is known as portfolio management—the process of selecting and managing a mix of investments to achieve a particular investment objective. Through careful asset allocation, individual investors, financial advisors, and institutional investors can all strive to better manage their risk and attain higher returns.
Portfolio management involves, first, selecting and allocating investments in a manner that maximizes returns and minimizes risk, and second, making sure that the mix of investments is reasonable for the anticipated future performance of the portfolio. In essence, portfolio management aims to ensure that the desired level of expected return is attained.
The first step in portfolio management is to identify the investor’s objectives. Each investor must decide for himself his goals for investing, which could involve any combination of capital preservation, income, and capital appreciation. By deciding one’s goals, an investor can select investments that are appropriate for his objectives.
The next step in portfolio management is to construct a diversified portfolio. To build a diversified portfolio, the investor or financial advisor must select assets in different categories, such as stocks, bonds, mutual funds, real estate, and cash equivalents. This diversification reduces risk by limiting the exposure to any particular asset class. The overall portfolio must also be maintained in line with the investor’s objectives.
After portfolio construction, the portfolio manager must manage the performance of the portfolio. This involves monitoring investments in the portfolio and making adjustments as necessary. This can involve rebalancing the portfolio, adding or selling out of particular positions, or shifting investments between asset classes.
Portfolio managers must take the time to review the performance of their portfolios on a regular basis. A regular review of the portfolio’s performance is essential to staying on track with the investor’s objectives.
Finally, portfolio managers must also be mindful of internal and external factors that can affect the portfolio’s performance. These external factors include changes in the economic climate and stock market trends, as well as government policies. On the internal side, portfolio expenses, taxes, and management fees all affect the performance of the portfolio. The portfolio manager must take these factors into account to make sure that the portfolio is managed to maximize its expected return.
In conclusion, portfolio management is an important part of investing. By utilizing careful asset allocation and thorough management techniques, individual investors, financial advisors, and institutional investors can better manage their risk and attain higher returns. By taking into account one’s personal objectives, constructing a diversified portfolio, and keeping track of performance, investors can ensure that their portfolios are managed to maximize the expected return.
