Portfolio Management

Portfolio management is the art of selecting and overseeing a group of investments that align with the long-term financial objectives and risk tolerance of a client, company, or institution. Some individuals manage their investment portfolios. This requires an in-depth understanding of the key elements of portfolio building and maintenance that make for success, including asset allocation, diversification, and rebalancing. Understanding Portfolio Management, portfolio managers work on behalf of the client, while individuals can build and manage their own portfolios. In either case, the portfolio manager’s ultimate goal is to maximize the investments’ expected return within an appropriate level of risk exposure. Portfolio management requires the ability to weigh the strengths and weaknesses, opportunities, and threats of a spectrum of investments. The choices involve trade-offs, from debt versus equity to domestic versus international and growth versus safety.

Passive vs. Active Management

Portfolio management can be either passive or active. Passive management is the set-it-and-forget-it long-term strategy. It may involve investing in one or more ETFs. This is commonly referred to as indexing or index investing. Those who build indexed portfolios may use the modern portfolio theory to help them optimize the mix. Active management involves attempting to beat the performance of an index by actively buying and selling individual stocks and other assets. Closed-end funds are generally actively managed, as are many mutual funds. Active managers may use any of a wide range of quantitative or qualitative models to aid in their evaluation of potential investments.

Active Portfolio Management

Investors who use an active management approach have fund managers or brokers to buy and sell stocks in an attempt to outperform a specific index, such as the Standard & Poor’s 500 Index or the Russell 1000 Index. Often, these investors will also use a portfolio management software system to help them track their investments. An actively managed investment fund has an individual portfolio manager, co-managers, or a team of managers actively making investment decisions for the fund. The success of an actively managed fund depends on a combination of in-depth research, market forecasting, and the expertise of the portfolio manager or management team.

Passive Portfolio Management

Passive portfolio management, also referred to as index fund management, aims to duplicate the return of a particular market index or benchmark. Managers buy the same stocks that are listed on the index, using the same weighting that they represent in the index. A passive strategy portfolio can be structured as an ETF, a mutual fund, or a unit investment trust. Index funds are branded as passively managed because each has a portfolio manager whose job is to replicate the index rather than select the assets bought or sold.

Discretionary vs. Non-Discretionary Management

Another critical element of portfolio management is the concept of discretionary and non-discretionary management. This portfolio management approach dictates what a third party may be allowed to do regarding your portfolio. Discretionary authority for a Registered Investment Advisor (RIA), means that the RIA has the authority to decide which securities to purchase, sell, and/or retain for their clients. Unlike broker/dealers, an RIA can make these decisions independently. Discretionary investment management allows portfolio managers to make buy and sell decisions without the client’s authorization.