In any kind of financial investment, you need to pay attention to risk and return. Usually, the greater percentage of your portfolio that you put at risk, the greater are the chances of you making a huge profit.
Nevertheless, it is wise to employ some risk management measures while trading in any kind of securities.
What is portfolio management?
A trader’s portfolio consists of instruments like cash equivalents, fixed deposits, bonds, mutual funds, shares, etc. Managing a portfolio means choosing the proper investment tools to the right degree to produce desirable results while balancing the risk associated with the investment.
Thus it can be said that each portfolio consists of an asset group. With a portfolio, you have the chance of diversifying your risk. Of course, this does not mean that the risk can be totally eliminated.
No matter what kind of security you are trading, there are mainly two risk types: diversifiable or unsystematic risk, and systematic or market risk.
No matter how smartly you build your portfolio, it is not possible to avoid market risk. The best you can do is lessen or eliminate the diversifiable risk, and as soon as there is a risk reduction, the return variability goes down.
Individuals who are masters at managing their portfolios aim to take the minimum risk while getting the most gains within a fixed period. You create a portfolio by considering your budget, income, and the amount of risk you are willing to take for a certain amount of expected gain.
Risk and return analysis
The risk and return for different securities must be assessed individually. For instance, when you give out a loan to an organization or an individual, you are not taking any risk, as there is a predetermined rate of interest according to which they will pay you back your money, and you will win a fixed amount of profit from it.
Investing in stocks and securities always carries a risk because there is no guarantee that you will win a profit. When an individual opens a fixed deposit account, there is no risk involved since it is certain that the invested amount will be multiplied after a certain amount of time.
In the same way, a person trading in Forex pairs must take some risk since the market is highly volatile, and the prices of currencies keep changing.
When you purchase an insurance plan, you do not take any risk. Thus, it is pretty clear that a person who exposes themselves to a higher level of risks has the chance of making profits compared to a person who limits their risks.
There are certain assets like deposits and check accounts that have low risk and low return. Fixed-term deposits and government bonds require you to take a low to moderate risk while promising moderate returns.
For moderate to high risk/return, you can choose to invest in real estate, while equities and stocks are high-risk, high reward investments.
Advantages of portfolio management
Here are the various advantages of portfolio management:
- It allows you to make better choices regarding investment. This means you are more likely to choose asset groups with a higher chance of bringing your profits. It lets you make decisions based on facts and figures while keeping in line with your financial objectives.
- When you manage your portfolio efficiently, it means you have a higher chance of making huge profits. A portfolio presents a solid framework based on which you can analyze the assets you wish to invest in and select the most suitable ones. This lets you win big profits, even when your account balance is modest.
- Through proper portfolio management, you can avoid disastrous consequences. It encourages you to invest in a wide range of securities. If you have only chosen a single asset class to invest in, you stand to lose a huge amount of money if your trade fails, but you can avoid this by investing in various assets.
- It helps you closely monitor how your investments are going. In the portfolio, the assets are presented in an integrated manner, allowing you to detect those not performing too well.
- In a portfolio, all your investments are arranged systematically. Thus, if you are in dire need of money, you can always sell some of the securities you do not need.
- It gives you a better understanding of how the market functions and makes you familiar with some of the key market concepts. This helps you improve your overall trading efficiency.
How to select a portfolio management service
Here are a few things to remember while choosing a portfolio management service:
- You need to ensure that the service provider has extensive knowledge about the financial market and is aware of the current investment plans and the risks that come with them.
- Portfolio managers usually charge a fee based on how large your portfolio is. You must make sure there is no grey area in the fee structure.
- Look for companies that take a personalized approach and communicate regularly with their clients through conference calls, meetings, etc.
- The service provider should provide an annual report on your investments. There should be a person who coordinates the funds, and you should be able to reach them at all times.
- The management style of the manager is also a vital aspect. While some are product-oriented, others concentrate on growth and value.
Now you know about portfolio management fundamentals, you can start working on it gradually to improve your trading experience. In order to become a successful trader, it is essential to mitigate your risks, and portfolio management is an ideal way of doing this.