What is Portfolio Management? Importance of Portfolio Management

In this blog, I want to answer the question of What is portfolio management and Why is it so important. But first, we need to understand what a portfolio is.

A portfolio is more like a collection of programs or projects and other work that are categorized together to enable effective management of that work, to meet strategic business goals.

A portfolio again can include projects, multiple projects or programs, or multiple programs or other work.

What is Portfolio Management?

Portfolio management is the selection, prioritization, and control of an organization’s programs and projects.

A portfolio manager’s role is to select projects and programs that will deliver the strategy that the organization has selected and to deliver the capability that will enable those projects and programs to be delivered within their specified parameters.

The goal of portfolio management has to be to balance, risk, and reward. The easiest way to think of it is to recognize that portfolio management in the project and program sense is very much a metaphor drawing on portfolio management.

In a financial sense and in a financial sense nobody would be wise to invest all of their funds in one type of investment, what we do is we create a portfolio of different investments a basket of investments with different levels of risk with different susceptibilities to economic trends.

We don’t know which of our investments will do particularly well, we don’t know which of our investments might fail, but if we get the basket of the portfolio right then the overall aggregate performance will be successful, and it’s exactly the same with projects and programs.

What the organization is trying to do is to predict the future to a degree and then invest in a range of projects and programs that together will address a wide range of scenarios. And for the most likely scenarios, it will address them very well so portfolio managers oversee a basket of projects and programs, and initiatives that together address a range of strategic imperatives for an organization.

This means that the practice of portfolio management is integral so the long term strategic implementation as a discipline port management integrates the three disciplines on the one hand we’ve got strategy development on another we’ve got projects and program management on the third hand we’ve got change management and together those three disciplines make up the role of a portfolio manager

And of course, a portfolio manager needs to be constantly reviewing and addressing the balance of their portfolio. They have to be prepared to reallocate resources from one initiative to another and sometimes to shut down projects and programs which are no longer serving the organization.

Whilst ramping up and accelerating other portfolio management in an organization is best served by a central portfolio management office. For a portfolio program and project management office a combined facility that brings together the skills of project management program management and portfolio management under one leadership so that that team can support project managers, program managers, and the portfolio manager at every level.

Objectives of Portfolio Management

1. Capital Appreciation

It is to make a rise from your Investment or double your investment to make it profitable. More like an increase in the price or value of assets. Capital appreciation is nothing more than just the rise in price due to the market, or the underlying factors of that security. This could mean that the general market is rising so most stocks are rising with the market, or that a particular company or ETF is doing well, or something good is happening in that sector or industry and so that causes a rise in price as well.

That’s one of the ways that you can obviously make money as an investor. Stock and equities traders are just to play the rise in capital appreciation. Now conceivably most people and investors in the entire investing universe 99 % of them, this is the only way that they know there’s a one-directional road to making money, and That’s a rise in the stock or ETF.

Investors can also generate income from selling, dividends, or from cover calls or play the decline in the capital (not the capital appreciation but capital decline), where you can profit from a decline in the underlying security. It’s an interesting concept because it’s a one-directional street that most people think you have to travel down but there are actually many paths to generating income so capital appreciation is one way, that’s how most people play it.

2. Investment Goals

An investment goal is a type of financial goal that you actually need to invest your money in. In order to reach it you know great examples are retirement, you cannot just stash away cash and expect to have enough to retire on.

You need to invest your money, so it grows, so you will have the amount that you need for retirement, Another example is you can invest your money for it this short term in order to have enough money for a down payment on a home, or if you have a child, and you want to make sure that they have enough money to afford college or university well you can invest your money to pay for their post-secondary education.

So if you want to get organized, and you were ready to make a firm investment plan for yourself before choosing an investment strategy, before choosing what kind of portfolio you want, what kind of investment products you want, to invest in. You need to determine what your specific investment goals are. Investment goals will actually help you determine what makes the most sense for you to invest in and also what kind of risk can you take on.

3. Portfolio Efficiency

You need to understand the market, and it will never be the same, as it goes through regressions, Inflation phase, Growth phase. It is actually to determine which investment Avenue will be suitable.

You can create a portfolio of two stocks or three stocks. This is a combination of as many different stocks with as many different risk features that creates the optimum level of risk versus return.

So here, every possible combination of risky assets, without including any holdings of risk-free, which are treasuries, can be plotted onto a risk expected return space to find the optimum market portfolio. The expected return for a given level of risk, not just the lowest risk. And that’s really important here.

We’re not talking about the highest return for the lowest risk. We’re talking about the optimal point at which each level of risk is equated to a higher level of expected return. The market portfolio is efficient now there is a set of these portfolios and some logical ideas and how you proceed with that to prove that.

4. Risk Mitigation

Mitigate a risk is to mitigate a threat. Risk mitigation is a response strategy whereby the project team acts to decrease the probability of occurrence or impact of a threat. We take those actions, and we are reducing the probability of the occurrence of that risk and or the impact of what impact to the schedule, impact to the budget. The mitigation is doing something proactively. Trading is all a probability game what

probability you always need to protect your downside. You always have a downside

so knowing that you have to implement advancements to bring down the probability or impact of the risk. Investors always prefer to mitigate the risks or lessen the risks. Higher the return, greater the risks, it is about how to handle those risks so that it does not affect a lot to the investors.

5. Asset Allocation

The act of deciding which asset classes to include in your portfolio and in what proportion, so they maximize returns for the level of risk you’re willing to take on.

How much money you would be allocated to equities that is to stop markets or mutual funds, or to warn schools and real estate. So depending on your long-term financial goals and short-term financial goals, depending on what’s the current situation of your financials,

What is your age?

How many dependents are there on you or what is the time horizon you’re looking at? 

Your risk appetite, how would you react if your portfolio goes down by a large extent?

Consider all these factors and that’s when with the help of your financial adviser you can allocate a certain amount of money to different asset classes. That is called asset allocation.

There are many assets, this is about choosing the assets appropriately, especially by doing diversification but not over-diversification.

6. Liquidity

Liquidity is easy for individual investors or firms. So that they could quickly sell or purchase assets without causing any drastic or major changes in the value of the assets, they want the liquidity to be maintained. Liquidity is a measure of how an asset can be exchanged at great ease.

It is essential to means how quickly you get money out of an asset. Your investments can be said to have stronger liquidity when you can quickly convert them into cash. Cash and stocks usually have high liquidity because they are generally easy to access and trade.

In contrast, real estate is generally less liquid, especially in times of economic crisis, as it may take longer to sell. Note that liquidity can refer to two different areas: liquid market and liquid asset. A liquid market means there are always investors on the market, willing to trade securities at every price level.

It’s a market with high trading activity. A liquid asset is a type of asset that can be easily turned into cash. There is no specific formula for liquidity. Mind that liquidity is extremely important when considering your trading positions and even your ability to exit them. Liquidity ensures you can easily get in and out of the market.

7. Diversification

You must have heard the old saying, don’t put all of your eggs in one basket? In spite of the small percentage of us who have ever collected eggs in a basket, the simple wisdom of this proverb is universal.

Namely, if you put all your eggs in one basket, and you drop that basket, you won’t be having an omelet for breakfast. However, if you divide your eggs across multiple baskets, dropping a single basket isn’t a disaster.

When it comes to investing, the same principle holds. If you invest all of your savings in a single company and that company goes under, your entire investment is lost.

But if you invest your savings across multiple companies, the poor performance, or even bankruptcy, of one company isn’t the end of the world. This principle of spreading your investments across different assets, called diversification.

8. Tax Planning

It is the process of analyzing a financial situation or a situation from a tax perspective. To reduce taxation by planning to ensure all the elements work together for it. Thus facilitating tax efficiency. Tax planning can also be said as making decisions to minimize your taxes but in a legal way and in a way without violating any rule.

Most people don’t have to worry about violating the rules in general but if you do something specifically to lower your taxes, for instance, if you do a transaction, or you create a scenario where it lowers your taxes significantly and the only reason that you did that was for tax saving reasons

Conclusion

So these all pretty much sums up how important portfolio management is. And we’re not talking about how to come up with a specific winning strategy in trading or investments. But we are talking about how to put them together. So this is why portfolio management is important.

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About Geet Sharma

My Name is Geet Sharma Financial Blogger & Founder of Paisabank.org. We are a personal finance blog dedicated to finance & financial planners. The main aim of this blog is to help people to informed about financial decisions.
View all posts by Geet Sharma →

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