An investment portfolio can be a complex collection of assets. 

Your portfolio doesn’t just refer to the assets you have in a particular investment or brokerage account. Instead, it refers to your holdings across all of your accounts, including your taxable investment accounts, 401(k) plan or Individual Retirement Account, and even your deposit accounts, such as certificates of deposit or money market accounts. 

Most portfolios are made up of primarily three things: stocks, bonds, and cash (or cash alternatives). Some people hold individual stocks and bonds, while others hold them through mutual funds and ETFs. However, a portfolio can also include alternative assets, including real estate, cryptocurrency, gold, and more. 

The purpose of a portfolio is to help an investor meet their short-term and long-term financial goals. Because each person’s goals and financial situation are different, so is each person’s portfolio. Good portfolio management is critical to ensuring each person is on the right track to meeting their goals. 

Understanding portfolio management 

Portfolio management refers to the process of choosing the investments in a portfolio, whether an individual chooses their own investments or hires a financial professional to do so on their behalf. 

As mentioned, a portfolio doesn’t just contain the assets in a single investment account. Instead, it is all of someone's investment and cash accounts combined. As a result, portfolio management can be very involved. It requires choosing the appropriate assets for someone’s portfolio and determining which account each asset should be in. 

Portfolio management has some key principles that apply to everyone, including diversification and tax efficiency. However, there are several different management strategies someone could take, including both active and passive management. 

There’s no one-size-fits-all solution to portfolio management. Whether you choose your own investments or hire someone else to, have one investment account or several, or take an active or passive approach, the most important thing is choosing a portfolio management strategy that will help you achieve your short-term and long-term financial goals. 

What does a portfolio manager do? 

A portfolio manager is someone who manages investment portfolios. While someone can technically be their own portfolio manager, the term usually refers to an advisory firm or a financial professional who people and organizations hire to manage their investment portfolios. 

Working with a professional portfolio manager has some key benefits. Not only does it free up the time you would have otherwise spent researching and managing your portfolio, but it also provides a certain level of knowledge and expertise that you may not have yourself. 

One of the most important initial tasks of a portfolio manager is to learn about their client’s goals, whether the client is an individual, a hedge fund, or an organization. Those goals, combined with the client’s risk tolerance and current financial situation, can help the portfolio manager create a strategy for the client's investments. 

A portfolio manager's job is never done, even once they’ve built a client’s portfolio. Instead, they’ll regularly check in on the client’s investments and adjust the portfolio for investment changes and as the client’s needs change. 

If you’re considering hiring a portfolio manager to help oversee your investments, it’s important to find a firm with professionals you can trust.

Active vs. passive portfolio management 

While it’s impossible to fit portfolio management into just two boxes, there are generally two strategies someone might use to manage all or part of their investment portfolio. 

Active portfolio management 

Active portfolio management is a hands-on approach to choosing investments. Its goal is to outperform its investment benchmarks, generally, a broad market or market-segment stock and bond index. This often requires actively buying and selling investments regularly. 

Active portfolio management is a significant undertaking, and many investors do not feel comfortable taking it on themselves. Instead, they might be more likely to hire a portfolio manager to do this for them. 

Instead of hiring a portfolio manager directly, you could also invest in actively managed mutual funds. You buy shares of the mutual funds, and then the fund manager makes the investment decisions for the fund. 

Keep in mind that active portfolio management, whether through mutual funds or a professional portfolio manager, often requires higher management fees because it involves the knowledge and expertise of the portfolio manager.

Passive portfolio management 

Passive portfolio management is a more hands-off approach to investing. Rather than trying to  beat the stock market, you’re simply matching its returns. 

A passive portfolio management strategy usually involves investing in index funds, which are mutual funds or ETFs that track the performance of an underlying index, such as the S&P 500 or the Bloomberg U.S. Aggregate Bond Index. As the stock market changes, so do the underlying investments of the index funds that you hold. 

Passive portfolio management has some benefits, such as generally lower fees since there isn’t a fund manager actively buying and selling investments. 

Another benefit of passive portfolio management is that it’s easier to do yourself. You don’t necessarily need to hire a professional (though you certainly still can). Alternative options include buying your own funds or using a robo-advisor that builds an index-fund-based portfolio using computer algorithms and your financial goals, this however does add to the fees. 

Portfolio management: Things to keep in mind 

Whether you’re hiring a portfolio manager to choose your investments, there are some key principles you must keep in mind. 

Asset location 

Your portfolio asset location refers to where you hold your investments. Generally speaking, there are two types of accounts: taxable and tax-advantaged. A taxable account is an investment account, such as a brokerage account, where you can buy and sell investments and will pay taxes on realized investment income yearly. Investment income is generally taxed at short-term or long-term capital gains rates or as dividend income, as applicable. A tax-advantaged account is something like a traditional 401(k) plan or IRA, where you invest with pre-tax dollars and don’t pay taxes on your earnings until you pull them out of the account. 

When you’re planning your investment strategy, asset location is more important than you think, as there are major tax implications. For example, an asset that generates significant income might be better off in your tax-advantaged account, while a more tax-efficient investment might be best for your taxable account. 

Asset allocation 

Asset allocation refers to the distribution of your investments by asset category within a portfolio. Each person’s asset allocation may look slightly different depending on their goals, risk tolerance, and retirement time horizon. 

For example, someone with a long time horizon or high risk tolerance might have an asset allocation that leans more heavily toward stocks. Meanwhile, someone who has a short time horizon — someone who is nearing retirement, for example — might have a more bond-heavy asset allocation. 

A key consideration when choosing your asset allocation is the relationship between risk and reward. Generally speaking, the higher the potential reward of an investment, the higher the risk. Keep that in mind when choosing your optimal asset allocation. 

Read more: Breaking down the average portfolio mix by investor age 

Diversification 

When you diversify your portfolio, you distribute your asset allocation across many different asset classes and individual assets. 

Diversification can come in many different forms, including: 

• Asset class diversification: When you diversify across asset classes, you include a variety of different asset classes in your portfolio, that may include stocks, bonds, cash, and alternative assets. 

• Company diversification: Company diversification refers to including many different companies’ stocks in your portfolio rather than just a small number. A broad market index fund is an easy way to achieve company diversification. 

• Geographic diversification: Rather than investing in companies in one geographic area, consider choosing those from multiple regions. Geographic diversification might involve investing in international stocks in addition to U.S. stocks. 

• Industry diversification: One of the best ways to diversify your portfolio is across different industries. There are 11 different stock market sectors, and a well-diversified portfolio likely includes each one in some quantity. 

Diversification isn’t just beneficial for portfolio management — it’s critical. Diversification can help mitigate your risk in a big way. If you invest your entire portfolio in a single company and that company fails, you lose 100% of your money. However, if you spread your money across many different assets, then the performance of a single company or industry generally has less of an impact on your overall portfolio returns. 

Read more: Beginner’s guide to portfolio diversification 

Rebalancing 

Rebalancing is the process of buying and selling investments to get back to your desired asset allocation. It’s a way of counteracting deviations caused by market fluctuations. 
Different assets grow at different rates. For example, suppose you have an asset allocation of 80% stocks and 20% bonds. Stocks often have higher returns, meaning they could grow to make up 85% or 90% of your asset allocation. Rebalancing would require selling stocks or buying more bonds to get back to your original 80/20 split. 

There are different approaches you can take to rebalancing. Some people rebalance their portfolios when their portfolio deviates a certain amount. Meanwhile, others rebalance at specific intervals, such as once or twice per year. 

Tax minimization 

Tax minimization can be one of the most important parts of portfolio management. Taxes can erode a significant amount of your investment returns, especially in a taxable brokerage account. 

When choosing your investments, you can use several strategies to minimize your tax liability, including being strategic with your asset location, investing in tax-efficient investments, and offsetting your investment gains with losses. 

Putting it all together 

Portfolio management integrates all of the key concepts we’ve talked about: asset location, asset allocation, diversification, rebalancing, and tax minimization. Knowing your investment goals and these key principles can help you build a portfolio that best serves you. 

How to manage your own portfolio 

Today’s financial tools have made it easier than ever for individuals to manage their own investment portfolios, and there are plenty of advantages to doing so. Self-management can help you save money on your investments and be more in tune with your personal finances – but it’s not for everyone. 

Read more: The four perils of self-managing your investments 

Managing your own portfolio should start with the same step as if you were working with a professional portfolio manager: goal setting. It’s important to determine both your short-term and long-term goals. These might include big, long-term goals such as retirement. It might also include mid-term goals like buying your dream home or paying for your child’s college education. Finally, it can include short-term goals like your next vacation. 

Know that each financial goal requires a different investment strategy. The assets you would choose to save for retirement aren’t the same as those you would use to save for the down payment on a house you plan to buy next year. It’s important to tailor your portfolio to your specific financial goals. 

Read more: Financial planning for your life 

As you’re managing your own portfolio, research the tools that are available to you. Investment accounts today make it easier than ever to choose your own investments. Meanwhile, robo-advisors may serve as a good middle-ground between self-management and hiring a professional. 

Finally, know that your goals and investment strategy will change over time. Your portfolio can and should change as you move through different stages of your life. 

Understanding the distinction: Portfolio management vs. wealth management 

There’s no shortage of jargon in the financial industry, and it can be confusing trying to keep all the different terms straight. Two of the most common terms are portfolio management and wealth management. While there’s some crossover between the two terms, there are also some important differences. 

First, portfolio management is just as it sounds — managing a portfolio. It’s the process of strategically allocating assets within your investment portfolio to help reach your financial goals. A primary objective of portfolio management is to maximize returns while minimizing risk. 

Wealth management, on the other hand, often refers to a broader financial service. Wealth managers often take a more comprehensive approach to financial management. In addition to managing someone’s portfolio, they might also advise them on other areas of their personal finances, including estate planning, tax optimization, and more. 

Additionally, wealth management tends to cater to high-net-worth individuals who may need more complex, comprehensive, and holistic financial solutions. 

Read more: What is wealth management? 

Our take 

Portfolio management is an important part of every investment strategy. If you have investments, whether you manage them yourself or work with a professional, you’re engaging in portfolio management. It’s important to take a strategic approach to ensure that your portfolio is best suited to help you reach your financial goals while minimizing your risk and tax liability.