Key Insights about Managing an Investment PortfolioMarch 15, 2019
Investment management isn’t a walk in the park. It requires a certain level of management skills and the ability to differentiate it from other types of TradersHome Broker management. Read on to learn more!
Investment Management vs. General Management
Definitions of investment management are very different from those of general management. For instance, portfolio management is defined as the art and science of making decisions about investment mix and policy, connecting investments to objectives, asset allocation for individuals, and institutions and balancing risk against performance. This is a very specific definition of management in the investment context.
On the other hand, the four pillars of general management still apply in investing and are clearly reflected in the definition of portfolio management. In spite of this, there is a chance for both investment managers and investors to understate or even ignore one or more of the basic general management principles. This is very dangerous.
For investors, planning and organizing are less problematic areas to overlook than leading and controlling. Control is the weakest point in managing investments.
Leading and Controlling
The reason why investors are so vulnerable to their TradersHome Review investment managers’ poor leadership and control of their money is that investors usually hand over their money after the planning and organizing have already finished.
That means it is the leading and controlling of these investments that tend to be neglected. If there is never any intention to actually manage the money in a strict sense, and investors know this or even want it, there is no problem.
But if people think they are getting active management and believe that it will protect them from the market and volatility, a lack of effective management is probably disastrous.
Active vs. Passive Management
It is very important that investors understand the difference between active and passive investment management.
Active managers depend on analytical research, forecasts, and their own judgment and experience in making investment decisions on what securities to buy, hold, and sell.
For comparison, passive management means that a fund’s portfolio is simply set up to mirror a market index. The fund is simply supposed to go up and down with the market. There’s no attempt to pick “good” and “bad” stocks.
In the investing world, a passively managed fund is still managed in a limited sense. Nonetheless, in the general management sense, passively managed investments are essentially unmanaged, and it’s important to understand this.
Likewise, a fund or portfolio that is never rebalanced or controlled is also unmanaged, hence the term “closet tracker.” Given the very common failure of active stock picking, there is undoubtedly nothing wrong with passive management, provided that nothing more is implied or promised.
What can we do?
Given that active investment management within an equity portfolio is of dubious benefit, a passively managed fund is certainly cheaper and may perform better over time than one that is managed actively.
On the other hand, what can and does work, if you can do it properly, is to manage the portfolio actively in terms of asset allocation, rebalancing, and loss-control instruments. Most experts agree that portfolios are optimized by monitoring, controlling, and adjusting the mixture of different types of investments within a portfolio.