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What Is Portfolio Management?

A portfolio manager chooses and maintains the best mix of investments to help clients achieve their financial goals.
Sept. 12, 2019
Advisors, Investing, Investing Strategy
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Your retirement accounts, those shares of stock your great uncle left you and the cash you’ve set aside to dabble in the market — broadly speaking, this disparate collection of accounts is your portfolio.

Portfolio management — done on your own or by a professional portfolio manager or an automated investing service — means coming up with and executing a cohesive investing strategy based on your goals, timeline and stomach for risk. Or, in more by-the-book terms…

Portfolio management definition

Portfolio management is the process of picking the type and mix of assets (stocks, bonds, etc.) to achieve a specific investment goal. A portfolio manager sets an investing strategy based on a client’s financial needs and risk tolerance, and provides ongoing portfolio oversight, adjusting holdings when needed.

The portfolio management process

Portfolio management decisions are guided by three main factors: an investor’s goals, timeline and risk tolerance.

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.

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.

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.

» How to invest for short-, intermediate- and long-term goals

Other aspects of portfolio management

Portfolio management isn’t solely about building and managing an investment portfolio. It also involves:

Asset location decisions about choosing the type of investment account to hold your assets. The decision between taxable accounts and tax-advantaged ones (typically retirement accounts like IRAs and 401(k)s) can have both near-term and long-term tax implications. For example, high-growth and income-generating investments are best held in a tax-advantaged account versus a taxable account. (Here’s more on choosing the best type of investment account for your goals.)

Rebalancing, the act of buying and selling investments within the portfolio. Portfolio managers do this to maintain the target allocation originally set for the investment strategy.

Tax minimization strategies 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.

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.

Robo-advisors use a sophisticated computer algorithm to set the portfolio allocation and automatically rebalance when necessary.

Like traditional portfolio managers, automated investing services — often called robo-advisors — allow you to set your parameters (your goals, time horizon and risk tolerance). Then a sophisticated computer algorithm sets the portfolio allocation and automatically rebalances when necessary.

These services also 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%). Here’s a side-by-side look at three services from our roundup of the best robo-advisors:

Management Fee

0.25%

0.25%

Account Minimum

$500

$500

Promotion

$5,000

$5,000

amount of assets managed for free

Management Fee

0.25%

0.25%

Account Minimum

$0

$0

Promotion

Up to 1 year

Up to 1 year

of free management with a qualifying deposit

Management Fee

0%

0%

Account Minimum

$100

$100

Promotion

Free

Free

career counseling plus loan discounts with qualifying deposit

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.

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