What is Portfolio Management?

Malcolm Tatum

Portfolio management is the task of effectively managing the investments contained within an investment portfolio. The ultimate goal of the management process is to allow the owner of the portfolio to achieve the maximum amount of return from the securities and other investments involved. This management process may be carried out by the owner of the portfolio, or by an agent who has been empowered by the investor to manage the assets in his or her stead.

Man climbing a rope
Man climbing a rope

There are many different styles of portfolio management. One approach is known as passive management. With this approach, the emphasis is on long-term investments that are considered stable and likely to earn a consistent return over time. Mutual funds and similar investments are often part of this strategy. Passive portfolio management requires that the manager remain aware of market movements that have some effect on the returns generated by the assets in the portfolio. The manager only executes orders to buy or sell securities when doing so will protect the investor and allow the level of return to remain within a reasonable range.

Active portfolio management is often the approach used when the portfolio is based on the inclusion of a majority of short-term investments. In this scenario, the manager is constantly on the outlook for opportunities that will increase the value of the portfolio in a period of one year or less. This sometimes involves aggressive trading based on projections of the movement of individual securities and the markets where those securities are traded. While more labor intensive than working with long-term investments, this approach can often yield significant returns in a short period of time.

The choice of portfolio management strategy will often depend greatly on the investment style of the portfolio owner. Investors who are willing to take on more risk in exchange for the chance to earn higher returns will often favor the active or aggressive approach. For investors that are more interested in creating a nest egg for the future and prefer assets with a stable history, a passive approach may be worth considering. In reality, the task of portfolio management often involves a combination of both approaches, especially if the investor chooses to maintain a diversified portfolio that includes both short-term and long term investments, as well as a varied mix of securities. The diversity allows the investor to enjoy the best of both worlds, since the long-term investments create a sound foundation for the portfolio while the short-term investments allow the investor to speculate and possibly get in on the ground floor of what is ultimately a lucrative investment.

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