What Is Portfolio Management?

Portfolio management is the continuous process of selecting, prioritizing, and monitoring the right mix of investments that fit the client’s financial goals, liquidity needs, and risk appetite.

Saying it another way, portfolio management refers to the cohesive investment decisions that yield long-term returns while fitting into the investors’ financial goals, current money needs, and the level of risk they’re willing to undertake.

Effective portfolio management processes need to be regular and consistent to ensure that there is no over-allocation in any asset class which increases the risk exposure. Portfolio adjustment is also necessary, as the financial goals and needs of the investor change over time.

4 Key Elements of Successful Portfolio Management

We can’t stress enough the fact that portfolio management needs to be tailored to an organization’s or individual’s financial goals. There are no cookie cutter strategies.

That said, there are a few elements that are fundamental to a sound investment strategy.

Persistent Portfolio Supervision

All portfolios should be measured against an appropriate benchmark, or combination of market indices that match the asset allocation of the portfolio. The performance of the portfolio, and each component therein, should be persistently reviewed to ensure it is doing what it was intended to do. Market and economic environments change all the time, as do individual investments be they funds or individual stocks or bonds. Persistent portfolio supervision refers to the investment process that allows your portfolio to be changed or adjusted with purchases and sales based on all relevant factors. This does not mean a high frequency of activity in purchases and sales, but it should mean a high frequency of assessment based on relevant data, performance and analysis.

Persistent portfolio supervision requires in-depth research, expertise, and market forecasting of a team of portfolio professionals.

Effective Diversification of Investments

Diversification doesn’t focus solely on investing in different asset classes. It takes into consideration the sources of risk, such as the performance of a company or inflation. The idea is to balance investments that have a low or negative correlation to one another to spread out the risk and maintain an entire portfolio that does not take any inadvertent or unnecessary risks.

For example, equities and high-yield bonds will expose your portfolio to the risk of company performance. However, inflation will eat into fixed-income investments. On the flip side, commodities investments appreciate with the rise of inflation. Effective diversification will have some or all these investments.

Cost Efficiency of the Investment Process

Fees are an unavoidable part of any portfolio management process. You should always be aware of all the costs associated with your portfolio. What is your advisor charging you? Is your advisor earning revenue other than what is being charged to you directly (e.g., commissions from financial products)? What are the individual funds charging? While the ultimate test is your net return (your return after all costs are subtracted), you still want to be aware of the overall costs and avoid unnecessary costs. You can obtain cost efficiency by taking fund costs into account when choosing which funds to include in a portfolio. You also want to assess if you are getting appropriate value for what you pay to the advisor.

A good financial advisor can save you money through:

• Effectively diversifying your portfolio
• Rebalancing your portfolio
• Locating your various investments in the most tax efficient accounts
• Managing expense ratios
• Cost efficient spending strategies (withdrawing assets in a tax efficient and investment-wise manner)
• Managing for total return
• Financial behavioral coaching

The rule of thumb is to choose a financial advisor whose fees are transparent and who is providing you with overall return on your investment.

Tax Efficiency

Tax efficiency in investment decisions refers to paying the lowest taxes required by law on your investments. Tax planning in investment portfolio management ensures that you keep as much of your money as legally possible.

Your financial advisor can help you obtain tax efficiency by:

• Allocating less tax efficient vehicles in a tax-deferred account, such as 401(k), Roth IRA, or an annuity
• Investing in tax-efficient mutual funds
• Purchasing municipal bonds which are tax exempt
• Tax-loss harvesting
• Holding assets in irrevocable trusts, like generation-skipping trusts, removes the assets from the investor’s taxable estate.

These methods are the tip of the iceberg in achieving tax efficiency. Your financial advisor should strategize ways to reduce tax liability in your investment portfolio.

Why Do You Need Portfolio Management?

At Stonecrop, we believe in empowering our clients and equipping them to realize their financial goals with the resources they have at hand.

Most investors choose and acquire their investment holdings piecemeal. This method fails to capture the bigger picture. Which includes considerations such as:

• Do the investments in your portfolio work well together?
• What is your overall risk exposure?
• Are you exploiting all the tax advantages available?
• Can you keep up with emerging investment opportunities

With years of in-depth market experience and research, Stonecrop’s financial advisors help you answer these questions—essentially manage your portfolio. Whether you’re an individual, family, or a non-profit organization, having our CFA Charterholders assess, strategize, and monitor your investments is the best choice for your financial health and goals.

Are you ready to make major league investment decisions? Contact us today for your first consultation.