Portfolio Management is a broad term that refers to the process of determining the structure and components of an investment portfolio based on a series of criteria specific to a set of individual circumstances and requirements.
In a professional context, for example with a mutual fund, portfolio management rests in the hands of a portfolio manager. You might have heard the terms “buy side” and "sell side." A portfolio manager for a mutual fund or hedge fund sits on the buy side of the market, while a retail broker or research analyst working for a brokerage resides on the "sell side."
Portfolio management is no different for you, as an individual investor. It just generally operates on a smaller level. The goal of portfolio management is to assure that an investment portfolio's individual components are allocated in a manner that allows the totality of it to be balanced and structured in a manner that meets the investor's goals and risk tolerance.
For the purpose of this article, your portfolio is the totality of your liquid assets, which means money that you hold in cash, in fixed income securities, in individual stocks (or equities, as they are called), in insurance annuities (or trusts) and stock funds.
Within these very broad categories there are many subsets of assets – for example, fixed income products include mutual funds, highly-rated corporate debt, distressed debt and more. Stocks include everything from domestic small- to mid-caps, to constituents of the large-cap S&P 500 index, to equities in emerging markets.
The prudent allocation of your capital among these many options sits at the heart of a personalized and effective portfolio management strategy.
As you can imagine, there are many factors that go into creating the right strategy for you. Some are personal – your income, your risk tolerance, your family situation and period to retirement. Some are external – for example, what you and/or your financial advisor think about the direction of the market. If you believe that the market is headed lower over a certain period, you’ll likely move more assets into cash or adopt a hedging strategy.
Additionally, illiquid assets – for example, real estate, fine art, antiques and jewelry - are part of a portfolio as well, and should be considered in a portfolio management strategy. For example, if you have a lot of money in speculative real estate, then you’ll may want your stock portfolio to be on the conservative side.
There are many options for individuals to consider toward finding the correct portfolio management strategy for them. While some hire a single financial advisor to manage everything for them, we’ve recently seen a trend away from that and towards a more blended, or hybrid approach. Many investors don’t want to put all their eggs in one basket, and are looking to achieve portfolio diversification not just within the portfolio itself, but also with regard to the management of the overall portfolio.
One example of this move to diversity in personal portfolio management can be found in what we offer at Covestor. We make a collection of expert money managers from around the world available in a single place. Investors looking to bring new ideas into their portfolios can find a manager who is best suited to meet their financial goals, based on investment strategy and risk tolerance.
On Covestor, an investor can look into a money manager’s entire track record; interestingly, traditional Financial Advisors rarely if ever provide a client with that access. Once an investor finds a manager they like, an account is established and the investor’s portfolios is “synched” to the manager’s so it mirrors each trade.
It’s important for investors to remember that their portfolio needs to be watched and monitored at all times; personal circumstances change, the circumstances of individual companies within their portfolios change, and the external market conditions are always in flux as well.