What You Need to Know About Portfolio Management

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The term ‘Portfolio Management’ is certainly not a new concept to those engrossed in the world of business or finance. However, while many of us have heard the term before, we may not understand it in its entirety. In simple terms, a portfolio is an assortment of investment tools or assets, to include stocks, bonds, cash, mutual funds etc. and the word management in this aspect refers to the professional services used to manage these assets. In addition, this term is sometimes interchanged with wealth management and asset management.

If you’re thinking about financial investment but haven’t fully committed yet, the first step should be opening a bank account. This allows you to start putting money away for when you finally decide on the type of investment that is right for you. If you are ‘on the fence’, the following information will definitely provide clarity, and outline the far-reaching advantages of an investment portfolio. Think about it this way, not only will YOU benefit from your diverse investments but your children and their children will also reap the rewards.

Why Do You Need An Investment Portfolio?

Truth is, in this unstable economic climate it’s best to be prepared for unforeseen circumstances, or even planned events such as funding your child’s college education or buying a house for your family. Then there are things such as job loss, natural disasters and illnesses— these things can lead to bankruptcy, if not properly prepared.

Job loss is listed as one of the top 10 reasons that people file for bankruptcy, according to an article on Huffington Post. Also on the list are medical expenses, reduced income, credit debt, foreclosure, student loans, overspending, divorce, utility payments and unexpected bills. The problem is that people fall into these situations because they simply didn’t have a plan B – an investment portfolio is your plan B.  So luckily, if any of the previously mentioned incidents should occur, you have a strong portfolio to fall back on. This is why it’s so important to consider this option; the benefits are countless and the earlier you get started the better it will be for you in the long run!

Do You Need Portfolio Management?

The answer is yes and here’s why: trying to navigate the risky world of investments can be overwhelming to take on by yourself, but even worse, it can result in the loss of millions of dollars, and you really don’t want to take that chance with your hard earned money. By employing an investment consultant you minimize these risks. 

This person- also known as a product specialist- understands your monetary goals and objectives and is therefore able to create product customization alternatives based on your specific financial needs.

There are many financial institutions that offer financial management services; these are known as private bankers or relationship managers. They play an integral role in the private banking ecosystem, and are often tasked with selecting clients and maintaining client relationships. Investment consultants and relationship managers work together to deliver significant value to you. Their goal is to ensure that you are given the best possible plan, one that has a high rate of ensuring maximum results for your investments.

It is really a full time job, so if you are a novice I certainly wouldn’t advise doing it without professional help. You can follow the stock market all you want, but if you don’t know what you’re looking for, or how to use the information it will all be in vain —don’t underestimate the importance of an expert portfolio manager!

Types of Portfolio Management

Once you’ve come to the realization that you actually need a portfolio manager, your next step is choosing the management strategy that will work to your advantage. The types available will likely depend on the organization that you’ve chosen to oversee your investments, but here are four popular options:

  • Active Management- For this strategy, the manager pays close attention to economy shifts and market trends and is actively engaged in the sale and/or purchase of investments to ensure maximum profitability.  This person has to be ‘on the ball’ at all times because timing is of utmost importance. 
  • Passive Management- Also known as passive strategy or passive investing, this portfolio management option doesn’t involve any forecasting on the part of the portfolio manager. It is the opposite of the previous point where the manager has to keep his eyes and ears fixed on the market. This one is not as risky as the ‘active’ option since you don’t have to worry about the repercussions of incorrectly predicting the future and losing millions of money as a result.
  • Discretionary Management-This selection gives your portfolio manager the ‘go ahead’ to make financial decisions on your behalf. With this discretionary option you simply hand over the funds and he/she takes care of all aspects of your portfolio to include documentations, paperwork and other investment needs. This is an ideal choice if you want to invest but are not really interested in the day- to-day happenings or ‘behind the scenes’ aspect of investment. It does, however, require a high level of trust as you are ultimately putting your financial future in someone else’s hands.
  • Non-Discretionary Management -As you can imagine, this is quite the opposite of the discretionary option. With the non- discretionary strategy your manager cannot make any financial decisions on your behalf. They are merely there to advise you on the best strategy to employ, but the final decision is yours to make.

Types of Portfolios

Now that you fully understand the concept of portfolio management, your next step is familiarizing yourself with the different types that are available. Your portfolio manager will undoubtedly explain these in more detail and help you to navigate the ones that are best suited for your needs. However, it is always best to do your own research especially when money is at stake. So, let’s look at some options:

  • Speculative- The word speculative should give a clue into what this one is about. If you are a risk taker this might be the one for you —it has the highest risk of all the others listed below. Investopedia purports that this type of portfolio is the “closest to a pure gamble.” Despite this, however, people may go this route since it usually compensates for its high risks with significant returns. It is recommended that you don’t invest any more than 10% of your investable assets into this type of portfolio.
  • Hybrid- Once again the name ‘hybrid’ is a giveaway as to what this type of investment entails—it is a combination of different portfolios. The advantage is that you get to enjoy the benefits that come with the variety, instead of just relying on one. This selection offers you a lot of flexibility allowing you to delve into art, real estate, bonds etc.
  • Aggressive-This alternative also involves a high degree of risks, or extreme market instability but it also offers high rewards. The Balance suggests that “an investor with a high risk tolerance and a time horizon longer than 10 years” employ this option.
  • Defensive- If you are just ‘wetting your feet’ in the financial investment pool, this might be a viable choice since it’s a more conservative type of portfolio. It typically employs strategies geared towards protecting investors from substantial losses. Government bonds and blue chip stocks are two great assets that can contribute to a secure defensive portfolio. Motif Investing also suggests that you focus on respectable companies with a solid history of operation, reasonable valuations and strong cash flows.
  • Income- As the name suggests, this method involves assets that actually yield income whether from dividends, interest, stocks, bonds, royalties etc. The main purpose of this option is to provide you with a source of revenue from your investments without tapping your principal. This one is often chosen because it is believed to be more low risk than the others.

Cost for Portfolio Management Services

This service does attract a cost, but one that is totally worth it since it actually minimizes the risk of long term monetary loss. The fee is used to compensate for time and effort spent for managing your personal assets. The two types of fees are often related to the underlying investments in the portfolio, and the yearly management fee (this is usually a percentage of the clients assets) charged by the company overseeing your portfolio. You can also expect to pay other costs such as transaction fees, commissions and performance fees — this is the percentage of profits made for the client.

However, as you’ve probably figured out by now, nothing in life is free, and sometimes you have to spend a little now, to make a lot later. This stands true for an investment portfolio; you will have to put some money into the process.  But with a reputable portfolio manager helping to guide you in this venture, there is no doubt that your financial future will be brighter and richer than you ever imagined.