Portfolio management: a complete guide


It’s fun to decide which stocks and bonds go into your portfolio, but there’s more to it. Good portfolio management starts before you pick your first stock. Later, it’s about measuring the results of your portfolio management strategy and your security choices.

A good portfolio management strategy starts with setting goals for the money in your account. These goals can be anything from saving for a house, retirement, charity, a child’s education, or a combination of things. Go ahead and go crazy! It’s your money, after all.

Once you’ve decided what you’re going to do with your investment portfolio, you’ll have a good idea of ​​your time horizon. Your time horizon is like a deadline for your money. If you plan to retire in 20, 30 or 40 years, you can incorporate this time horizon into your portfolio management strategy.

Your time horizon can also help you decide how volatile your account should be. For example, certain securities like stocks generally have higher highs and lows than bonds. You have a short time horizon if your time horizon is only a few months or years.

Investors with short-term horizons might find stocks too risky. It’s not that owning a group of shares is a risk in itself; the risk is that stocks fall right at the finish line of your target.

Portfolio management strategies

The key to a good portfolio management strategy is asset allocation. Asset allocation goes beyond the stocks, bonds, cash or other investments you choose to put in your portfolio. It is also the percentage of each asset class you have chosen.

If your time horizon is only a few months, you can choose to invest 0% of your money in stocks. Since you don’t have stocks, you might want to keep your money mostly in cash, because it won’t fall. Investors with very long-term horizons may want a much larger allocation to equities. With a longer time horizon, investors can tolerate a decline in stocks and benefit from the higher potential return of stocks.

Another thing to consider is that the price of your stocks and bonds will fluctuate over time. When this happens, your initial asset allocation may also change. For example, let’s say you started your account with 75% and 25% bonds. After a year, stocks have outperformed bonds, and your portfolio is now 85% stocks and 15% bonds.

To keep your asset allocation as desired, you can sell stocks and buy bonds until your account returns to its intended allocation of 75% stocks and 25% bonds. Investors call this portfolio management strategy rebalancing.

Types of portfolio management

When you have chosen the right asset allocation for you, the next step is to choose the right investments. You can choose to pick your own stocks and bonds or take a hands-off approach.

An active portfolio management strategy allows investors to choose their own investments in stocks and bonds. Investors may opt for active portfolio management because they believe they will outperform stock market indices or because they simply enjoy doing it.

A passive portfolio management strategy chooses stock and bond investments made to match stock and bond indices. Stock or bond index mutual funds and ETFs can be an easy way for investors to quickly and easily address their asset allocation strategy.

Keep in mind that a passive strategy will never outperform the market. On the other hand, he will never underperform either.

If you like a strategy that can give you the chance to outperform the market without taking the time and effort to pick your own stocks, you’re in luck! Professional portfolio managers manage active mutual funds or ETFs that attempt to outperform their index over time.


Diversification is the idea that you shouldn’t put all your eggs in one basket. For example, it wouldn’t be a good idea for a stock investor to put all their money in a single stock. The risk is that the title is doing very badly or, even worse, falling to zero! In this case, it could take years to recover and put your finances at risk.

Wise investors will diversify their stocks. That way, if a few of their stock picks are poor, the entire portfolio can still achieve its goals.

In addition to diversification within stocks, investors may want to diversify across asset classes. Different asset classes like stocks, bonds and cash are typical. Investors may also hold securities in asset classes such as real estate or commodities.

You can even diversify within each asset class. For example, you can hold large, mid, and small cap stocks in your stock allocation. In your bond allocation, you can have municipal, corporate, treasury, and many other types of bonds.

Portfolio returns

Any good portfolio management strategy includes an examination of the rate of return of accounts. There are several ways to measure the rate of return. The easiest way to look at the rate of return is the holding period rate of return. This measure does not take into account how long the security or portfolio has been held.

The formula looks like this:

(P2 – P1) / P1


P1 = Value at start

P2 = final value

Most of the time, the rates of return are annualized. This means that returns are calculated on an annual basis. If the return period is less than one year, returns are extended to an annual basis. This way, stocks and portfolios can be compared fairly.

Often, investors use the internal rate of return (IRR) to find the annualized rate of return on their investment. The IRR formula is very complex and difficult to calculate by hand. Instead, you can more easily find the IRR of an asset or portfolio with a financial calculator or Excel spreadsheet.

Investors should also think about how the taxes on their investments. For example, municipal bonds are generally tax exempt. So comparing the return of a tax-free investment is different. For tax-free investments, investors can find their equivalent tax return.

BJ Cook is a lifelong stock market nerd. He has held several positions in the world of equity research and earned the right to use the CFA designation in 2014. When he’s not writing for Investment U, you can find him seeking new ideas of investment. Outside of the investment community, BJ is a die-hard Cubs fan.

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