By : Merlin Joy, Senior Financial Trainer
Updated : April 7, 2020
A portfolio is a collection of the investor’s assets purchased that possibly consists of securities such as bonds, stocks, mutual funds, pension plans, real estate and sometimes even physical assets (commodities).
Portfolio management in the stock market is to maximize the investment’s expected returns with minimal risk exposure. While carrying out this process the trader should be able to point out strengths and weaknesses, opportunities and threats. There are two distinctive types, namely, passive and active portfolio management where passive is a long-term strategy that involves investing in one or more exchange-traded index funds, and active management involves actively buying and selling individual stock and other assets trying to surpass index investment. Like every other management process, portfolio management too has a set of elements that weighs importance to maximize the returns. Diversification is where trade is placed across various securities, geographical regions and other sectors of the economy. This way potential risk and reward can be spread wide. Thereby seeking returns from all the different sectors at a given time reducing volatility. Diversification has to be practiced to predominantly manage one’s portfolio.
To effectively manage one’s portfolio, assets have to be maintained with a long term mix. A mix of assets will protect against risk providing balance, as it’s based on the understanding that some can be more or less volatile than each other. Usually, investors with heavy profiles move forward with their portfolio towards growth stock which is seen to more volatile and conservative investors mostly prefer stable investments with less volatility. With diversification and asset allocation the trader is pushing the portfolio to increase the returns. Re-balancing is essential as it brings the portfolio to its original position from time to time. It generally involves selling high-priced securities and putting that money to work in lower-priced securities. This in return allows the investor to attain gains and expand the opportunity for growth. Re-balancing helps to align with the original risk to reward ratio.
Active management requires extensive research, market forecasting, and a well-maintained management team. A portfolio manager should pay close attention to market trends, political and economic changes that affect the company in any way. This includes national events that take place affecting the whole market. This particular data is utilized to take care of the irregularities faced by investors. Hence boosting potential returns with less risk involved. Human error while selecting stocks is out of the question when it comes to index investment that eliminates risk to an extent.
To add more clarity to the portfolio it is important to invest on a regular basis. This will help the investor cultivate the much-needed investment discipline simultaneously increasing wealth over a long period of time. With a rising income level, investments can also be raised.
Another key factor the investor needs to pay attention is not to keep all apples in the same basket i.e. not to commit all the investment into a single position. First, invest small amounts in one particular stock and see whether the performance of that stock is meeting your expectations and then think of using more investment for a full position. Make sure to restrict the number of stocks in your portfolio and only add a new stock once either one of the originally purchased stocks has been sold off. In addition, allocate your maximum funds to the best-performing stocks in your list, whichever shows more strength.