Portfolio management is the process of picking the type and mix of investments such as stocks and bonds, to achieve a specific investment goal, then monitoring and adjusting those investments over time.
Portfolio management: key takeaways
- Your portfolio management style will be defined by what you need. Saving for a house looks different than saving for retirement.
- Consider specifics like asset allocation, rebalancing and tax minimization.
- How involved do you want to be? You can manage a portfolio, or let a robo-advisor or financial advisor take care of it for you.
What is portfolio management and what does a portfolio manager do?
Portfolio management is the process of coming up with and executing a cohesive investing strategy based on your goals, timeline and risk tolerance. Portfolio management can be done on your own, with the help of a professional portfolio manager or through an automated investing service.
A portfolio manager creates an investing strategy based on a client’s financial needs and risk tolerance, and provides ongoing portfolio oversight, adjusting holdings when needed. You don’t need a portfolio manager if you’d prefer to manage your investments on your own, but if you’d rather be hands-off, you may want to work with a professional.
Portfolio management process
Portfolio management decisions are guided by four main factors: an investor’s goals, how much help they want (if any), timeline and risk tolerance.
1. Setting goals: Your savings goals — retirement, a home renovation, a child’s education or family vacation — determine how much money you need to save and what investing strategy is most appropriate to achieve your objectives.
2. Figuring out how much help you want: Some investors may prefer to choose all their investments themselves; others would be more than happy to let a portfolio manager take over. If you can’t decide, a robo-advisor (a service that uses a computer algorithm to choose and manage your investments for you) might be an ideal solution, as these services are very low cost. Portfolio managers will charge more than a robo-advisor, but they typically offer a customized portfolio and other services beyond portfolio management, such as financial planning.
3. Mapping out your timeline: When do you need the money you’re investing, and is that date set in stone or flexible? Your timeline helps inform how aggressive or conservative your investing strategy needs to be. Most investment goals can be mapped to short-, intermediate- and long-term time horizons, loosely defined as three years, three to 10 years and 10 or more years. If, for example, you need the money within three years, you’ll want to minimize your exposure to the short-term volatility of the stock market.
4. Determining your tolerance for risk: An investor’s willingness to accept risk is another key driver behind diversification decisions, or the mix of assets you hold in your portfolio. The more risk you’re willing to take, the higher the potential payoff — high-risk investments tend to earn higher returns over time, but may experience more short-term volatility. The goal is to strike the right risk-reward balance, picking investments that will help you achieve your goals but not keep you up at night with worry.
» Looking for a portfolio manager? Learn about how to choose a financial advisor
Aspects of portfolio management
Portfolio management isn’t solely about building and managing an investment portfolio. Here are some of the more important aspects of portfolio management.
Asset location answers one question: Where are your investments going to live? The type of account you pick will become your investments’ home — and there are lots to choose from. The key is to pick the best type of investment account for your goals.
Part of picking an investment account is choosing between taxable accounts and tax-advantaged ones. This decision can have both short-term and long-term tax implications. You’ll want to be sure to use designated retirement accounts like IRAs and 401(k)s for your retirement savings, because these offer tax advantages — for example, money you contribute to a Roth IRA grows tax-free. (Learn more about Roth IRAs and their tax benefits.) You may also want to have a standard taxable investment account to invest for non-retirement goals (like saving for a down payment).
Rebalancing is how portfolio managers maintain equilibrium within their accounts. Portfolio managers do this to stay true to the target allocation originally set for the investment strategy. Over time, market fluctuations might cause a portfolio to get off course from its original goals. Read about ways to rebalance your portfolio.
Tax minimization is the process of figuring out how to pay less overall in taxes. These strategies work to offset or lower an investor’s exposure to current and future taxes, which can make or break an investor’s returns. It’s important to consider the tax implications of investment decisions to avoid pricey surprises from the IRS.
putting it all together
Portfolio management in the real world combines all of these aspects into one personalized portfolio. Say an investor is planning on retiring in five years and doesn’t want to take as much risk. They have a 401(k) from their employer (their asset location) where they put a portion of their paycheck. Their asset allocation could be 50% stocks and 50% bonds. If this ratio changes over time, and the investor winds up with a portfolio closer to 55% in stocks, that gives them a riskier portfolio than they are comfortable with. The investor or a portfolio manager would then rebalance the portfolio to bring it back to its original 50/50 ratio.
Tax minimization can go hand and hand with asset location. For example, if you choose to locate your assets in a Roth IRA, you are inherently minimizing your taxes since qualified Roth distributions are tax-free in retirement.
Types of portfolio management
Two main portfolio management strategies are active and passive management.
Active portfolio management: Active portfolio managers take a hands-on approach when making investment decisions. They charge investors a percentage of the assets they manage for you. Their goal is to outperform an investment benchmark (or stock market index). However, investment returns are hurt by high portfolio management fees — clients pay 1% of their balance or more per year to cover advisory fees, which is why more affordable passive portfolio management services have become so popular.
Passive portfolio management: Passive portfolio management involves choosing a group of investments that track a broad stock market index. The goal is to mirror the returns of the market (or a specific portion of it) over time.
Like traditional portfolio managers, robo-advisors allow you to set your parameters (your goals, time horizon and risk tolerance). Robo-advisors typically charge a percentage of assets managed, but because there is little need for active hands-on investment management, that cost is a fraction of a percent in management fees (generally between 0.25% and 0.50%). (View our picks for the best robo-advisors.)
If you want more comprehensive help — investment account management plus financial-planning advice — consider using a service like Facet Wealth or Personal Capital. These services combine low-cost, automated portfolio management with the type of financial advice you’d get at a traditional financial planning firm — advisors provide guidance on spending, saving, investing and protecting your finances. The main difference is the meetings with your financial planner take place via phone or video instead of in person. (View NerdWallet’s list of the best financial advisors.)
Portfolio management vs. wealth management
Portfolio management deals strictly with a client’s investment portfolio and how to best allocate assets to fit their risk tolerance and financial goals. Wealth management is the highest level of financial planning, and often includes services like estate planning, tax preparation and legal guidance in addition to investment management.
» Need more information? Learn about the different types of financial advisors.