Learning about portfolio management is a great first step for beginner investors looking to grow their savings. Portfolio management is the backbone of investing — it is the process of creating and maintaining a mix of investments. Read on to learn about the four keys to successful portfolio management.
4 keys to successful portfolio management
Your investment portfolio is the mix of investments you own and may include anything from stocks and bonds to real estate and cryptocurrency. Portfolio management is the practice of managing these investments to best achieve your short and long-term financial goals. Here’s how to get the ball rolling.
1. Setting goals
Before you create and manage a portfolio, you should have a clear idea of your investment goals. For example, you might be aiming to save for a down payment or accumulate wealth for retirement. Typically, beginners should set specific and realistic goals that are simple to track, making it easier to achieve important financial milestones.
2. Level of involvement
The next step to successful portfolio management is gauging how involved you want to be in the process. This will determine the investment strategy you use, as well as the investment platforms you might consider. For instance, people who enjoy a high degree of involvement in their investments tend to prefer working closely with advisors — or may want to manage their portfolio on their own. On the other end of the spectrum, someone who wants less commitment might opt for a robo-advisor — a type of automated investment service — that offers hands-off portfolio management.
3. Establishing a timeline
Mapping out a timeline to achieve your financial goals is essential to portfolio management. Your timeline will influence your investment strategy — for example, whether you choose aggressive, high-return investments with short time horizons, or low-risk, low-return investments with a longer trajectory.
4. Determining your risk tolerance
Understanding your risk tolerance is an important step in portfolio management for beginner investors. Risk tolerance is simply the level of risk you’re willing to stomach, and this is something that differs from person to person. People with a higher risk tolerance usually opt for high-risk investments, like stocks and cryptocurrency, while people with a lower risk tolerance tend to prefer low-risk investments, like mutual funds and bonds.
Elements of portfolio management
Let’s break down the broad concept of portfolio management. In general, portfolio management can be sliced into three main elements:
Asset allocation: This refers to how you divide your portfolio among different types of assets. An asset is essentially your investment — for example, a stock you own is an asset. Your asset allocation is largely influenced by your risk tolerance. A person with lower risk tolerance, for instance, will probably dedicate a larger portion of their portfolio to low-risk assets like fixed-income investments.
Diversification: To put it simply, diversification is about not putting your eggs in one basket. A diversified portfolio is one where you’re invested in a range of assets types from different industries and geographies. Portfolios that are highly diversified tend to see lower volatility, but this also means lower average gains.
Rebalancing: You might find your portfolio straying from your original asset allocation. This could be because of changes in market conditions or simply because you haven’t checked on your investments in a while. In these cases, you might tweak your investments to rebalance your portfolio so that it better aligns with your financial goals.
Passive vs. active portfolio management
Portfolio management can be split into two main strategies: passive versus active investing. Passive investment is a more hands-off approach to portfolio management. Typically, passive investors choose a mix of investments that match the returns of a market index — like the Nasdaq Exchange. This can be done using tools like exchange-traded funds. Passive investors who prefer not to track an index could also use a robo advisor. This algorithm-driven software helps you manage your portfolio by making trades according to the parameters you’ve chosen. This means that you end up putting less time into personally managing your day-to-day portfolio. Active portfolio management, on the other hand, is an investment strategy that calls for a more hands-on approach. You could actively manage your own portfolio through stock trading. Alternatively, you might trust an active portfolio manager. In exchange for a small fee, this professional investor actively helps your portfolio beat the typical market returns. Here’s a summary of the differences between passive and active portfolio management.
Passive portfolio management
Active portfolio management
Strategy
Hands-off approach that requires less frequent monitoring
Hands-on approach that requires more frequent monitoring
Types of investments
Index investing or investments made through robo-advisors
Investments made by you or an active fund manager
Fees
Typically 0.25% – 0.5%
Typically > 1%
Compare robo advisors
If you’re looking for a hands-off approach to portfolio management, consider using a robo-advisor or a broker that offers fully-managed portfolios. Compare your options using the table, and select Go to site to visit a provider’s website and learn more.
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Tax minimization and portfolio management
Tax minimization is an investment strategy where you pick investments that reduce the amount you pay in taxes. But before we talk about minimizing taxes, let’s briefly understand how investments are typically taxed in the US. You’ll encounter investment taxes in two ways:
When you make income from an investment, say through interest or dividends earned.
Capital gains tax — a tax incurred when you profit from the sale of your investments.
Dividends and interest are usually taxed at your ordinary income tax rate. And as for investments sold for a gain, the type of tax you’ll encounter depends on how long you held the asset. Short-term investments held for a year or less tend to be taxed at your ordinary-income rate, while long-term investments held for over a year enjoy lower tax rates capped at 20%. Certain investments have special tax treatments, so be sure to check with a financial advisor before creating your portfolio. You should be especially wary when making international investments, as taxation laws might be different from what you’re used to. Ultimately, taxes eat into the profits you’ve made from investing. Thankfully, there are certain ways you can manage your portfolio to minimize taxes:
Tax-loss harvesting. This strategy involves selling certain investments at a loss to offset high short-term capital gains taxes. It can be tough to execute manually, but numerous robo-advisors are equipped to offer tax-loss harvesting.
Long-term investing. Since long-term capital gains taxes tend to be lower than short-term capital gain taxes, it may be beneficial to focus on long-term investments held for one year or more to minimize the impact of capital gains.
Tax-advantaged accounts. Individual retirement accounts — or IRAs — are investment accounts that offer tax advantages, like tax-deductible contributions and distributions.
4 credentials to look for in a portfolio manager
If you don’t mind slightly higher fees in exchange for a portfolio that is managed on your behalf, then you might want to consider working with a portfolio manager. A portfolio manager is a professional who creates an investment strategy based on your financial goals and risk tolerance. They actively manage your holdings so that you can enjoy a more hands-off approach. Most portfolio managers begin their careers as financial analysts. They then climb the ranks from junior to senior analyst, before diving into portfolio management. Here are some credentials that you might want to read up on when assessing a potential portfolio manager.
Registered Investment Advisor (RIA). Registered Investment Advisors must register with the US Securities and Exchange Commission (SEC) and are bound to serve the best interests of their clients by fiduciary responsibility.
Chartered Financial Analyst (CFA). Credentials like the Chartered Financial Analyst designation from the CFA Institute typically require financial analysts to hold a relevant bachelor’s degree and over four years of work experience.
Certified Financial Planner (CFA). Qualified portfolio managers that earn their Certified Financial Planner designation have years of experience in the industry and must pass the CFP exam.
Relevant educational background. While this isn’t a requirement, most portfolio managers have master’s degrees in finance, economics, mathematics, business administration or other related degrees.
Bottom line
Portfolio management is an essential tool for beginner and advanced investors alike. Use our guide to craft your approach to portfolio management — whether passive or active — to achieve your financial goals.
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