What is portfolio management?
Portfolio management is the organisation of an investor’s financial assets to reduce risk and maximise return. This involves making calculated decisions about investments and using trading strategies.
Where have you heard about portfolio management?
If you have an investment portfolio, you will likely have been advised about the importance of portfolio management.
BNP Paribas has recently been in the news for cutting €3 billion in risk-weighted assets from its loan portfolio. This led to the French bank being named ‘Credit portfolio manager of the year’ at the Risk Awards'
What you need to know about portfolio management...
There are five main aspects to consider when managing your portfolio effectively:
Risk tolerance – typically, the higher the risk, the greater the return. If you take big risks you may achieve big gains or big losses, but if you avoid risk completely you are unlikely to make any gains or losses. Your ideal portfolio should strike a careful balance of risk depending on your risk tolerance.
Performance measurement – setting benchmarks and measuring how your investments perform allows you to keep track of any errors and establish the risk-return ratio. If you employ a portfolio manager, remember to take into consideration their investment style in performance management of your portfolio.
Allocation of assets – assets move differently and have different levels of stability. Choosing a mix of assets can help to reduce risk and maximise return by weighing up volatility and investing accordingly.
Diversification – the volatility of markets and the risk involved with investing can be mitigated by investing in various different securities, markets and economic sectors. This means that if one market crashes, you won’t lose all of your money.
Rebalancing – the market values of securities changes over time, affecting the return of your investments and their weighting in your portfolio. Regularly rebalancing your portfolio ensures you keep a good balance of risk and return by returning the asset weighting back to its initial level.