We turn towards the stock market expecting to make big money. Yet a majority of times we fall prey to over enthusiasm and frenzy. The trouble is that many investors add more and more stocks to their portfolio in the hope that the bulk will give way to bigger bucks. Yet stocking up on useless investments is likely to take you ten steps backwards rather than two steps forward.
Investing is an art form. It takes knowledge about the stock market, but more importantly it requires a strategy. The top investors don't get there by hoarding, but instead know the value of a strategized approach.
While it may take some time to become an ace investor, you can start with the basics and work your way up from there. The first step to succeeding in your money-making goal is to systematically create a portfolio which works for you best.
Your Investment Portfolio
A portfolio is essentially a record of your gains and losses. Any asset which can ultimately procure a profit, such as real estate, stocks or other investments is considered part and parcel of this compilation of your worth.
Building up a healthy investment collection is a step by step process. The art of creating a profitable portfolio lays in tailor-making it to fit the goals and limitations of the investor. Before you begin to select your investments, you must determine how tolerant you are of the risk involved. If you base your decisions on your risk profile, it will guarantee you some peace of mind.
Another point to consider while creating your portfolio is that diversification is your safety net. Having a good mix of investments is the key to minimizing risk while building up your profits.
Apart from these essentials, a profitable portfolio hinges on being well-maintained. The entire exercise of staying updated about the stock market and analyzing various risks and returns can be extremely chaotic. To ease the process you must create some order; and this is where portfolio management comes into play.
Portfolio Management
Portfolio Management is concerned with allocating assets while downsizing risk. Most importantly it is about matching goals to outcomes. This requires an analysis of the potentials and pitfalls related with the various options available to an investor.
Portfolio management is a boon for investing as the selection caters to the individual's financial goals. It provides a strategy and a solution based on the need and suggests the best route that an investor should take.
Portfolio Manager
A portfolio manager has knowledge about the stock market and uses it to further other investor's gains.
The manager must have a clear picture of the investor's expectations to find a suitable strategy and deliver the best possible returns.
Though the objective of money-making remains the same, the role of the manager sometimes differs.
Types of Portfolio Management
- Active Portfolio Management
The aim of the active portfolio manager is to make better returns than what the market dictates. Those who follow this method of investing are usually contrarian in their approach. Active managers buy stocks when they are undervalued and start selling when they climb above the norm.
Active portfolio management involves the quantitative analysis of companies to determine the cost of stock in relation to its potential. To do this, the active manager shuns the efficient market hypothesis and instead relies on ratios to support his claim.
To downsize risk, the active manager prefers to diversify investments amongst the various sectors. The issue with active portfolio management is that it all comes down to the manager's skill. But should you find one with the necessary know how, the value investing method will likely bring in good gains.
- Passive Portfolio Management
At the opposite end of active management comes the passive investing strategy. Those who subscribe to this theory believe in the efficient market hypothesis. The claim is that the fundamentals of a company will always be reflected in the price of the stock. Therefore, the passive manager prefers to dabble in index funds which have a low turnover, but good long-term worth.
With index funds, your cash is invested percentage-wise in proportion to the market capitalization. What this means is that if a company represented 2% of the 500 Index, then Rs. 2 would be invested into the company for every Rs.100 put into the 500 fund.
The point of opting for the lower yield is to combat the cost of management fees, while profiting through stability.
- Discretionary Portfolio Management
A discretionary manager is given full leeway to make decisions for the investor. While the individual goals and time-frame are taken into account, the manager adopts whichever strategy he thinks best.
Once the cash has been handed to the professional, the investor sits back and trusts that the profits will roll in.
- Non-Discretionary Portfolio Management
The non-discretionary manager is simply a financial counselor. He advises the investor in which routes are best to take. While the pros and cons are clearly outlined, it is up to the investor to choose his own path. Only once the manager has been given the go ahead, does he make a move on the investor's behalf.
Whether you decide to use a portfolio manager or you choose to take on the role yourself, it is important to opt for a viable strategy and ensure that it is put forward in a logical way. The merit of maintaining a sensible portfolio is that it cuts down the confusion while providing investments that fit the individual's goals.
