What Is Portfolio Management?
Portfolio management requires the ability to weigh strengths and weaknesses, opportunities and threats across the full spectrum of investments. The choices involve trade-offs, from debt versus equity to domestic versus international and growth versus safety.
Portfolio management may be either passive or active in nature.
- Passive management is a set-it-and-forget-it long-term strategy. It may involve investing in one or more exchange-traded (ETF) index funds. This is commonly referred to as indexing or index investing. Those who build Indexed portfolios may use modern portfolio theory (MPT) to help 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. Active managers may use any of a wide range of quantitative or qualitative models to aid in their evaluations of potential investments.
Frequently Asked Questions
Passive management is a set-it-and-forget-it long-term strategy. Often referred to as indexing or index investing, it aims to duplicate the return of a particular market index or benchmark and may involve investing in one or more exchange-traded (ETF) index funds. 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.
Asset allocation is based on the understanding that different types of assets do not move in concert, and some are more volatile than others. It is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance, and investment horizon. The three main asset classes – equities, fixed-income, and cash and equivalents – have different levels of risk and return, so each will behave differently over time.
Diversification is a risk management strategy that mixes a wide variety of investments within a portfolio. A diversified portfolio contains a mix of distinct asset types and investment vehicles in an attempt at limiting exposure to any single asset or risk. Since it is difficult to know which subset of an asset class or sector is likely to outperform another, diversification seeks to capture the returns of all of the sectors over time while reducing volatility at any given time. Basically, it involves spreading risk and reward across various classes of securities, sectors of the economy, and geographical regions.