What Is Portfolio Management?


Investment goals and your attitude toward risk will change over time.

Portfolio Choices

A financial portfolio holds your investment collection. Building this portfolio means choosing from several options: certificates of deposit, money market funds, company stocks, corporate and government bonds, mutual funds and cash. Each has risk characteristics; bonds, for example, will fall in price if interest rates rise, and "safe" cash will lose big if inflation kicks in. Most financial advisers will steer clients away from stock options, currencies and futures; these speculative investments -- as fun as they may seem -- just don't belong in a retirement or savings portfolio.

Your Age, Your Risk

The first and weightiest branch on your investment decision tree is a consideration of your age and your aversion to risk. "The key is to decide when you're going to need the money back and to figure out your risk tolerance by looking at your past experiences," advises Mike Connor of Dougherty and Company in Sioux Falls, South Dakota. The longer you have until retirement, the more risk your portfolio can tolerate -- but attitude toward risk is a personal thing, and some people are more comfortable with volatile investments than others. However, "there's risk in not taking risk," Connor warns. Totally safe investments will offer meager returns that eventually vanish with the effect of price inflation.

Debt and Equities

Portfolio managers make a simple distinction between debt and equities: bonds, for example, are debt instruments, while equities are ownership shares. Most bonds pay a fixed rate of interest for a fixed period of time. An investor buys a bond, collects the interest payments every six months and then either sells the bond or waits until it matures, when the company that issued the bond pays back the face amount. Equities are company shares that rise or fall in price with market demand and may return a share of the company's profit in the form of dividends. "You have to consider dividends," says Connor. "On a cash-flow basis, they often beat bonds."

Art Beats Science

Despite the profusion of numbers, percentages and decimal points in the investment world, managing a portfolio is more art than science. Books, magazines and Internet sites are loaded with hidden gems, magic formulas and the secrets of wealth creation "they" don't want you to know about. It's smart to keep abreast of economic stats, but there's no strictly right or wrong way to deal with trends in interest rates, economic growth, currency fluctuations, inflation and investor confidence numbers. The mundane truth is there's no such thing as a simple equation that guarantees maximum returns. Instead, a bit of self-knowledge allows you to dispense with the unsolicited advice from the self-interested and instead plan a portfolio tailored to your individual situation.

Watch the Churn

A portfolio pro can manage your investments and take some of the headache out of your financial life. Good ones explain patiently, invest in companies for a reason, answer the phone and resist the temptation to "churn" your portfolio. If they charge by the transaction, they'll drive their own fees up by constantly buying and selling. Others may find an excuse to "realign" your investment mix in response to the latest financial news -- and thus keep on churning. If you're in discussions with a financial planner, talk about the best way to keep the portfolio calm and your desire to hold on to well-performing investments no matter what.