Why is it important to engage in portfolio management?

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portfolio management
Financial Advisory
Head of Wealth
August 11, 2021
minute read

A guide to understanding what portfolio management is, and how you can use it to achieve your investment goals

Portfolio management — you may have heard it referred to as part art, part science. And in a way, that’s true. When undertaken correctly, portfolio management is somewhat of an art form—but one that’s based on data.

In this article, we’ll look at what portfolio management is, how it’s achieved, and how it should make up a key pillar of your long term investment strategy.

Ready to put some structure around how you invest? Liston Newton Advisory can provide you with expert portfolio management advice and support.

What is portfolio management?

Portfolio management is the specific process of selecting the best investments for your financial goals. The act of portfolio management itself helps busy individuals stay on top of their investments in a more structured way.

Portfolio management involves monitoring, prioritising, and controlling your investments— both current and future — to ensure they continue to work towards your investment strategy. It’s about carefully identifying and analysing the strengths and weaknesses of different investment options.

The key here is to manage the investments within your portfolio so you include a range of different assets. So not just shares, but things like bonds, cash investments, securities, and even property. By diversifying your portfolio in this manner, you’re providing flexibility and agility to your entire portfolio, so it can weather volatility within the market.

And when it comes to portfolio management, you don’t have to go it alone. Engaging a professional portfolio manager ensures that you’re accessing the support and guidance you need to ensure your portfolio continues to work towards your goals.

The portfolio management process

1. Determine your financial objectives

The most important step is to determine what you want to achieve with your investments. Is it to secure your finances prior to retirement? Or perhaps you’re looking to grow your wealth?

Once you determine what you’re looking to achieve, you can then create a strategy that works towards this. If you choose to work with a professional portfolio manager, they can help you plan this out. They’ll meet with you to discuss your financial goals, and help you determine the investment strategy that’s going to help you achieve this.

2. Choose the right asset class

Once you’ve defined your strategy, your portfolio manager will then identify the most appropriate asset classes that will deliver the best returns on your investment, based on your goals.

3. Undertake strategic allocation

Your portfolio manager will weigh your varied asset classes against your preferred level of risk. The different weightings determine how much money you have invested into each type. So for example, it might be 70% of your money invested in defensive asset classes, and 30% in growth asset classes.

4. Monitor and evaluate performance

Your portfolio manager will continue to monitor the performance of your portfolio to ensure it’s performing at an optimum level, and keeps moving you forward towards your goals. They’ll measure its performance at regular intervals and determine where it can be improved and optimised.

5. Rebalance your portfolio

Over time, the weight of your asset investments will need to be redistributed, to account for market changes or changes in your life.

To achieve this, your manager will redistribute the weight of your asset allocations in order to enhance the effectiveness of your portfolio.

Different investment styles

investment styles

The style of investment that your or your portfolio manager will undertake typically mirrors your overarching investment philosophy. As such, your investment style should be appropriate to meet your financial goals.

Active portfolio management

Active investing sees your portfolio manager do just that. They take an active role in managing your investments, buying and selling assets on your behalf in order to maximise your profits.

However, this is can be an aggressive strategy, and can come with risk, so is better for those who have the appetite for it.

Passive portfolio management

In this style, your portfolio manager deals with a fixed portfolio. They don’t go around buying and selling; instead, they ensure that your money is invested in assets that will achieve your goals, while designed to match the current market scenario.

Value investing

Value investing sees your portfolio manager invest in assets that trade at a discount to their real value. Essentially, assets that are a bargain, and make you a profit. Buying the asset at a low price means you’re getting a better deal; the real value of the asset has yet to be seen, so its value will only increase.

Growth investing

Your portfolio manager will target asset classes that are likely to grow. They’re going after high returns, which in turn makes it a higher-risk investment style.

Contrarian investing

Contrarian investing seeks to buck the trend of the mainstream investor. Under this style, your portfolio manager will invest in assets that are a bargain at the time—while going against what the majority of the market is doing.

The theory here is that if the majority of investors believe that a specific asset is moving in a particular direction, then they’ve already acted on it. Therefore there’s no future event that’s going to push the asset further in that direction. It’s already peaked, and won’t have any further growth.

By investing in assets that are yet to move, they’re investing in future potential for growth.

Managing risk

As with all investments, there’s a level of risk involved with portfolio management. And this is where your portfolio manager becomes invaluable.

They’re trained to take this risk on board and ensure your portfolio navigates the changes in the market. They’ll balance your portfolio in a way that makes sense for your investment goals, setting your investments against your preferred level of risk.

Their aim is to help you achieve your investment goal, not catch the wave of every new investment trend. They know what to look for, and how to read the market, staying ahead of any major issues or dips.

By engaging a qualified portfolio manager, you’re creating a safety net to proactively manage your portfolio risk.

The final word

Engaging in portfolio management is a smart move. It enables you to put structure and thought around your investments.

And engaging the services of a professional portfolio manager is ever smarter. It puts your investment portfolio in the hands of a trained professional, who manages your investments with your best interests in mind. They use their training and expertise to choose the best asset classes for your needs. They also know how to weigh your investments the right way, to achieve the level of growth and security that you desire.

By choosing the right portfolio manager, you can directly manage your risk and work faster towards your long term goals.

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