The key to successful investing lies in proper portfolio management. This involves strategic asset allocation, security selection, and risk management. Effective portfolio management requires setting appropriate investment objectives, time horizon, and risk tolerance as specified in an investment policy statement (IPS). This article provides an overview of core portfolio management concepts using the key words ‘a and h investment’.
Diversification reduces portfolio risk without sacrificing returns
A well-diversified portfolio can reduce volatility and risk through lower correlation amongst asset classes and securities. As the reference articles explain, the portfolio variance equals the weighted average variance of each asset plus covariance terms. Lowering correlation amongst securities enhances diversification benefits. But diversification alone cannot prevent losses in market downturns.
Portfolio management strategies differ across investor types
Investor objectives and constraints dictate optimal portfolio management strategy. As illustrated, defined benefit pension plans have long-term horizons and low liquidity needs. Endowments and foundations also take a long-term view. In contrast, banks and insurance companies need to match assets and liabilities, requiring ample liquidity.
Passive index investing offers simplicity, low fees
Index funds and ETFs offer diversified market exposure at minimal cost. These passively managed products track market benchmarks, avoiding potential risks of active security selection. Indexing has become increasingly popular given competitive long-term performance.
Hedge funds and alternative investments add diversification
Hedge funds utilize leverage, derivatives and complex strategies to enhance and preserve wealth. They expand the opportunity set beyond traditional stocks and bonds. Private equity, venture capital, real estate and infrastructure can also improve portfolio diversification.
Regular rebalancing maintains target asset allocation
Rebalancing trades assets to maintain desired risk exposures consistent with the investment policy statement. As security prices fluctuate, portfolios drift from target allocations. Rebalancing forces theselling of appreciated assets and buying of depressed ones, benefiting returns over time.
Effective investment portfolio management requires diversification across asset classes, security selection approaches, and risk factors. Strategic asset allocation, low-cost passive products, alternative investments, and rebalancing improve portfolio outcomes. Tailoring investment strategies to objectives and constraints also boosts performance.