Takeaways
- Portfolio management is the process of steering investments to meet financial goals.
- Portfolio management uses asset allocation, diversification, and rebalancing.
- Portfolio management is divided into two main strategies: active and passive.
- Professional portfolio management fees range from free to 1.5% or more of AUM.
- Robo-advisors or investment professionals manage portfolios, or you can manage your money.
What Is Portfolio?
A financial portfolio is a collection of your assets, including stocks, bonds, real estate, cryptocurrency, mutual funds, and exchange-traded funds. Many types of assets, including alternative assets, make up your portfolio. Financial experts use the term “portfolio” to refer to your collection of assets. Portfolio management is the science of overseeing your basket of investments.
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What Is Portfolio Management?
Portfolio management involves creating and overseeing an investment strategy based on your financial goals, risk tolerance, and timeline. It consists of curating a portfolio of stocks, bonds, certificates of deposits, and real estate and monitoring their performance over time.
Portfolio managers shepherd investment portfolios for individuals, small businesses, and larger institutions. For your portfolio, you can hire an investment professional, select one of the best robo-advisors, or manage your money.
If you want a traditional portfolio manager, ensure they have the proper credentials. Here are some credentials to look for: Registered Investment Advisor, Certified Financial Planner, Certified Public Accountant, or Chartered Financial Analyst. Portfolio managers with these designations have to pass rigorous industry examinations.[1][2]
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How Portfolio Management Works
Portfolio managers are licensed financial professionals who manage investments on behalf of clients. Technically, you can be your own portfolio manager if you manage your money. A portfolio manager aims to maximize a portfolio's value within a given set of parameters, including risk tolerance, benchmark, and asset allocation.
Investment analysis is a core skill set of portfolio managers because they must analyze a portfolio and make investment recommendations based on what their clients provide. This process involves weighing the pros and cons of investing in different asset classes and risk spectrums within each asset class. Portfolio managers must also navigate asset allocation within a portfolio or the split between debt and equity investments.
Depending on how portfolios manage your investments, they can take a more active, hands-on approach or a passive, set-it-and-forget-it approach.
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Portfolio Management Strategies
Generally speaking, there are two portfolio management strategies: active and passive. Here's the difference between approaches:
- Active portfolio management involves trying to beat the performance of a benchmark index, such as the S&P 500 or Dow Jones. Managers actively buy and sell the best stocks, bonds, and other assets to exceed this hurdle rate. Managers can use quantitative and qualitative metrics to select the best investments.
Hedge funds, mutual funds, and individual portfolios can be actively managed to try to beat the market's historical return. Clients tend to pay high portfolio management fees for actively managed funds, which range from 1% to more of assets under management (AUM).
- Passive portfolio management takes the opposite approach of active management. It involves creating a long-term investment strategy, curating a group of investments to meet your goals, and deploying capital. With passive portfolio management, the goal is not to exceed a benchmark rate of return but to mirror market performance.
Portfolio managers adopt a set-it-and-forget-it approach. Usually, this means investing in mutual funds, index funds, or ETFs that track baskets of investments. This diversified exposure reduces risk. Passively managed accounts charge much lower fees than actively managed accounts. For example, robo-advisor fees range from 0.25% to 0.5% of AUM, a fraction of the actively managed fees.
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Who Uses Portfolio Management
Portfolio management is used by anyone trying to effectively steer assets toward growth. Here are some cohorts of folks that regularly use sophisticated approaches (which you can, too):
- Retail Investors: Individual investors, known as retail investors, regularly implement portfolio management (even if they don't realize it). This can involve stair-stepping up their investment risk by increasing their comfort level by investing in CDs to stocks to cryptocurrency.
- Venture Capital: Professional investment shops known as venture capital firms fund early-stage startups and also invest in publicly traded companies. They must manage investments over a 5- to 10-year horizon, which is a critical variable when curating their investment portfolio. Most of these funds are closed funds, meaning investors cannot access them until a specific date.
- Hedge Funds: These funds are managed by investment professionals who pool capital to invest in highly concentrated positions. They aim to generate significant alpha and substantially beat market returns to attract investor capital. Hedge funds use leverage and trading strategies, like shorting stocks, to make money consistently.
- Pension Funds: Defined benefit plans, often given to public sector employees, pay regular, guaranteed income. Pension funds manage these funds and apply investment techniques based on the fund's mandated returns and investment policy.
- Institutional Investors: Wall Street is made up of large institutional investors who manage billions of dollars in investment capital. These financial institutions manage individual capital, corporate investments, and public sector capital. Institutional investors consist of investment funds that invest across markets, assets, geographies, and risk profiles.
Must Know Portfolio Management Terms
There is a boatload of financial terms to know when it comes to finance. Here are eleven to get you started when chatting about portfolio management:
Active Management is the investment strategy of portfolio managers who actively buy and sell stocks and other securities to beat market returns or another benchmark.
Alpha is the extra return a portfolio or investment makes above the benchmark rate of return, which is usually the stock market.
Asset Allocation is the split of assets across asset classes in your investment portfolio, traditionally the proportion of stocks and bonds. It also encompasses the mix of risk levels, geography, and market capitalization. Conservative portfolios tend to have a higher percentage of bonds, and aggressive portfolios have more stocks.
Asset Class is a group of similar investments that generate value for investors. There are different types of asset classes, including stocks, bonds, real estate, cryptocurrency, and commodities.
Benchmark is a standard that investors use to gauge portfolio performance. A common benchmark is a stock market index, like the S&P 500 or Dow Jones.
Beta measures a stock's volatility compared to the market. A stock with a beta greater than one is more volatile, and a beta less than one is less volatile than the market.
Diversification is the process of allocating investments across an array of investments to manage risk and returns. Investment diversification is considered to be the key to long-term asset management.
Passive Management involves mirroring a benchmark index and taking a set-it-and-forget-it approach. Portfolio managers select investments at the fund’s conception and then sit back and monitor its performance over time.
Rebalancing a portfolio is the process of periodically adjusting its asset allocation. By changing the mix of stocks or bonds, you can more closely match your financial goals and desired risk-return profile.
Risk Tolerance is your ability to withstand the machinations of pricing volatility comfortably. High-risk tolerance investors gravitate to high-risk-reward investments (e.g., Bitcoin). In contrast, investors with lower risk tolerance enjoy investments with constant returns and little price movement (e.g., certificates of deposits).
Tax-Loss Harvesting is the process of “harvesting” capital losses in the tax year to offset investment gains. This strategy can reduce your tax liability and shed poor-performing investments from your portfolio.
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How to Manage Your Portfolio
You don't have to hire a portfolio manager to manage your money effectively. It might help to consult with a financial advisor, but here is how to get started managing your own money:
1. Create Investment Goals: Financial goals are critical to developing a well-considered asset management strategy. These goals are usually correlated to life events like paying off debt, investing in stocks, buying a home, and saving for retirement.
2. Choose an Investing Approach: Your personal preference determines whether you select an active or passive portfolio manager. Consider how much you want to be involved in daily, monthly, or yearly asset management. Robo-advisors provide a fantastic hybrid solution for in-person check-ins with mostly passively managed investments.
3. Understand Your Risk Tolerance: How well do you manage your emotions when your investment balance dips into the red or green? If you can handle high levels of value fluctuation, you can have a higher “risk-on” investment portfolio. On the other hand, if you want steady growth without sharp movements, your risk tolerance is low. Where you fall on this spectrum usually determines when you need access to your funds.
4. Build a Timeline: What you invest in depends on your investment time horizon. For example, suppose you are investing for retirement in your 20s or 30s. In that case, you can take advantage of Target Date Funds, which automatically rebalance the fund's allocation of stocks and bonds as you approach retirement.
5. Start Investing: Regularly deploying capital into the stock market or savings products like CDs or high-yield savings accounts is part of healthy asset management. Two commonly adopted investment philosophies include lump sum investing or dollar cost averaging. Fresh capital can assist with investment diversification. Beginning to invest and remaining invested in bull or bear markets is a vital component of building long-term-oriented portfolios.
6. Monitor Portfolio Performance: Part of managing your portfolio is creating regular "check-ins." If you subscribe to the passive investment philosophy, you should only monitor your investments once a year. Financial advisors typically recommend at least an annual review of your assets. You might feel like a stock trader with how often you check market news for actively managed funds.
Smart Summary
Portfolio management is the art and science of effective asset management. You can oversee your investment portfolio or defer investment decisions to professional money managers. You will need to pick whether you prefer active or passive portfolio management, which is usually based on your risk tolerance and personal disposition. If you want to accelerate your investment growth, you might pick high alpha funds or be more conservative and try to match stock market returns.
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(1) FINRA. Series 65 – Uniform Investment Adviser Law Exam. Last Accessed April 10, 2025.
(2) CFA Institute. CFA Program exam information. Last Accessed April 10, 2025.
