A portfolio is basically a collection of someone’s financial assets. Those assets can be stocks, bonds, real estate and even cryptocurrencies. The goals of portfolio management are to select the appropriate assets to invest in according to a person’s risk tolerance and investment horizon.

Portfolio Management Explained

If you have a high-risk tolerance and you want to invest for, say 5 years, then you are probably going to invest in the more volatile risk assets like growth stocks or cryptocurrencies. This strategy can yield great returns in a short period of time but has a higher risk of failing.

On the other hand, if you are a risk averse person with a long-time horizon, then you would probably want to invest in non-cyclical stocks that also pay you a dividend and some bonds. In the end it all comes down to your own needs as the portfolio should be structured according to your personality.

There are also two different portfolio management strategies: one is the active management, and the other is passive management. Active management involves more work because you have to do your analysis on the assets you want to invest in and be more active on the buying and selling side as different business cycles favour different allocations.

The goal is to have beat the market returns. Passive management is generally done by investing in an index fund that tracks a market benchmark like the S&P500 and doesn’t involve much work from the investor’s side. This strategy worked well if we look at historic S&P500 returns yielding on average 10% per year over many decades.