Investing is daunting. It feels like in this day and age, there’s a flurry of tips on where to put your money coming from the news, social media, financial professionals, and even in day-to-day casual conversation.
With so much information, it’s hard to tell what someone should do to achieve their financial goals.
There’s no surefire way to make big returns from investments. But with portfolio management, investors set themselves up for success by making calculated decisions that balance risk and reward. Here’s what you need to know.
What is portfolio management?
Portfolio management refers to the practice of overseeing and managing a group of investments to achieve investment goals associated with wealth management.
For each individual and entity, investing fulfills a different purpose. Some value steady, long-term growth, while others chase short-term gains to maximize the return on their dollars now at the cost of higher risk.
Managing a portfolio requires tailoring a collection of investments that reflect the goals and values of the individual. It isn’t about making the “best” investments, but acknowledging that what’s “best” is contingent on the account holder.
In some cases, the individual is managing their own accounts and thus are doing their own portfolio management. But portfolio management can also be handed off to a portfolio manager, financial advisor, or other investment professional.
Types of portfolio management
All portfolios are different, but there are three main ways that portfolio management differs from account to account.
Active vs passive portfolio management
A lot of investing success is measured by comparing the portfolio against a benchmark.
If the portfolio manager is actively buying and selling securities to maximize the return and outperform the benchmark, they are taking an active portfolio management approach.
In this practice, the portfolio is composed of mostly individual stocks and securities that are frequently bought and sold for short-term wins.
If the strategy is to try and match the performance of the benchmark by holding onto index funds or exchange-traded funds (ETFs) for long-term gains, it’s considered passive portfolio management.
Index funds and ETFs are pre-made bundles of investments that are constructed with the intent of matching a benchmark performance level. A portfolio made up of these investments can be held passively for an expected long-term gain, hence the name of the management strategy.
Discretionary vs non-discretionary management
Discretionary and non-discretionary management styles are two different ways of working with a portfolio manager.
If the relationship falls under discretionary management, the portfolio manager is granted authority to buy and sell investments without having to consult with the client, so long as the manager holds up their fiduciary duty.
But if the client needs to approve every purchase and sale of a security, it’s considered non-discretionary management.
Generally speaking, there’s less buying and selling action in a non-discretionary management style given that each action requires approval.
Strategic vs tactical asset allocation
Portfolio managers are responsible for dividing up funds into different investments to create the full investment portfolio. Strategic and tactical asset allocation are two different philosophies on constructing the portfolio.
Strategic asset allocation has a pre-determined percentage breakdown of how much money should be invested where. For example, the strategic asset allocation could outline that 60% is held in index funds and the portfolio manager is responsible for distributing that 60% across different index funds.
Tactical asset allocation does not hold the same standards. In this situation, the portfolio manager has leeway to change the portfolio’s asset mix based on short-term results. For example, if they believe that medical technology will be high growth in the near future, they can move as much of the money they deem reasonable into those investments.
Simply put, a portfolio manager has more freedom to chase short-term returns with tactical asset allocation than a portfolio manager with strategic asset allocation.
The Portfolio Management Process
The portfolio management process can be broken down into five steps.
Evaluating the current situation
Before thinking about portfolio management, it’s important to collect all surrounding information about the investor. This includes how much money is going to be managed, whether they’re managing long-term debt like a mortgage, and what expenses are on the horizon.
All of this context is essential to setting investment objectives. It helps determine what’s possible and whether the investor’s goals are achievable or reasonable given their situation.
Setting investment objectives
Investment objectives will start broad before being whittled down into a precise and measurable outcome. Maybe the objective is to have enough capital to afford a down payment on a house, which is followed by determining how much capital would be needed, what the starting point is, and the growth trajectory that would achieve the goal.
Also considered during this step in the process is the risk tolerance of the investor. A higher risk tolerance means the investor is willing to risk losing money or falling short of their goals if it means the possibility of a higher return.
The portfolio manager is then responsible for determining whether their goals are achievable at the given risk tolerance.
Determining asset allocation
Before any investments are purchased, an asset allocation is constructed. The asset allocation determines how the total investment amount is distributed over what asset classes (types of investments).
In strategic asset allocation, these will be hard-and-fast percentages that the portfolio must adhere to. But in tactical asset allocation, it will act as a loose guideline that can be adjusted based on potential short-term wins.
Choosing investment options
In each asset class, the portfolio manager then chooses what specific investments the money will be invested in.
In discretionary management, the portfolio manager is acting on their own, choosing the investments and completing the purchase without the need of the client’s approval.
However, if it’s a non-discretionary management relationship, the client must approve of all purchases before they are completed and the portfolio is fully composed.
Monitoring performance and rebalancing
As time passes, the portfolio manager will confirm the portfolio is performing as expected. If not, they will change either:
- The individual investments within each type of asset class
- The asset allocation across different types of asset classes
In the short term, the portfolio manager is more likely to change individual investments rather than the asset allocation, especially if they take the strategic asset allocation approach.
Common portfolio management strategies
Portfolio management strategies are as vast and varied as the portfolios out there. However, there are five main buckets that a portfolio management strategy can be categorized into.
Aggressive
An aggressive portfolio management strategy takes on a high level of risk to maximize the return generated, often looking to “win big” on a single investment. The investor prefers individual stocks in unproven or alternative industries rather than assets that create a steady return over a long period.
Conservative
Conservative portfolio management strategies are favored by investors who want consistent, reliable growth for long-term buy-in. Their goals are to meet the industry benchmark with a portfolio of proven index funds and ETFs, shying away from individual stocks that are higher risk.
Moderate
A blending of aggressive and conservative, moderate portfolio management allocates some funds to consistent, low-risk investments and uses the rest to try and get big wins. They diversify their investments with a mix of high-risk and low-risk investments to beat the market, but without taking on too much risk.
Tax-based
Given that gains from investments are taxable income, some investors favor strategies that minimize their taxes paid. They may set their investment goals on a certain amount earned as to keep them out of a higher tax bracket or keep their tax bill in check. This also involves investing in retirement funds that defer taxes until a later date.
Income-based
If someone’s entire income is derived from investment activity, they will take an income-based portfolio management approach. This typically involves setting an investment objective of a certain amount to be earned throughout the year to cover expenses and create a surplus for further investment.
Key elements of successful portfolio management
Whether you’re a well-practiced investor or new to the principles of portfolio management, all successful portfolio management uses these key elements.
Risk assessment and management
Every portfolio has the goal of generating money, the difference is how much risk the investor is willing to take to get there.
Even if someone is taking an aggressive portfolio management approach of high-risk, high-reward stocks, the management of the individual investments is of the utmost importance. The portfolio manager should be mindful of when stocks are bought and sold, how they affect the makeup of the portfolio, and keeping the risk tolerance in check
Accurately assessing risk and maintaining a portfolio that balances potential outcomes is what drives successful portfolio management.
Asset diversification strategies
A portfolio should reflect the unique wants and needs of the investor. To do this, portfolio managers must master different diversification strategies that adapt to new information.
There’s so much material out there that tries to answer the question of what’s the best diversification strategy. But the truth is, the best strategy reflects the needs of the investor.
Portfolio management shouldn’t take a prescriptive approach of applying the single, best approach. Rather, it should compare and contrast different approaches to determine what’s best for the investor.
Evaluation metrics
Portfolio managers leverage several different evaluation metrics to confirm their portfolio is achieving the level of return while staying within the investor’s desired risk level.
Some of the most commonly used metrics are:
- Treynor ratio: Also known as the reward-to-volatility ratio, measures how much extra return was generated when compared to a no-risk investment
- Sharpe ratio: Also known as the reward-to-variability ratio, measures the performance of an investment relative to a no-risk investment after adjusting for its risk level
- Jensen’s Alpha: How much excess return was generated over its expected return
Most portfolio managers will use a combination of the above to evaluate the performance of a portfolio, in addition to any of their personally preferred measurements.
Benchmarking
Portfolio management success is not determined in a vacuum. Rather, it’s contextualized against different benchmarks of industry-wide performance.
The most prominent benchmark is the risk-free rate of return. This theoretical rate of return estimates what an investor could earn on an investment with zero risk.
The risk-free rate is calculated by looking at the interest paid on a 10-year government Treasury note (or T-note), which is considered one of the safest investments as it’s government-controlled.
Since 2023, the risk-free rate has fluctuated between 3% and 5%.
Otherwise, investors look at market indexes like the S&P 500 and Dow Jones Industrial Average to measure how the industry as a whole is performing.
Challenges of portfolio management
Even with experience, know-how, and preparation, portfolio management has its challenges.
Market unpredictability
Nothing is truly predictable, and the investment market is no exception. Unexpected turns, economic cycles, and general volatility can impact portfolio performance.
This is a known risk for those who are keen to chase short-term returns, with the caveat of taking on higher-risk investments. But for those playing the long game, a severe impact on the portfolio hinders their ability to grow their portfolio or may scare them into pulling out.
It’s important to accept that portfolio management has its potential losses, knowing that over a long enough period, the practice will have its intended result.
Measuring and understanding risk
For those new to investing, risk is a difficult concept to understand and use in practice. If something is considered high risk, that doesn’t mean it should be avoided completely; rather, it’s about diversifying the portfolio so risk is kept in check.
Working with a portfolio manager takes out some of the guesswork. Portfolio managers specialize in translating investment goals and turning them into risk tolerances and asset allocations that reflect the investor.
For someone managing their own portfolio, understanding the risk of a single investment, and how it affects the risk level of the portfolio as a whole, are invaluable skills in achieving financial goals.
Managing costs and taxes
Buying and selling investments comes with trading costs, typically in the form of fees and commissions. Frequent trading will accrue costs that eat into the returns generated by the portfolio.
There are also taxes to consider. Everyone is taxed on capital gains, though some accounts minimize the taxes that must be paid.
Part of working with a portfolio manager is tax planning. The manager will consider the income of the account holder and optimize which investments are held in what accounts to keep taxes paid to a minimum.
Benefits of effective portfolio management
Getting up-to-speed on the principles of portfolio management take time and practice. But once you’ve got the fundamentals down, you’ll enjoy some of these benefits.
Financial growth on your timeline
Portfolio management isn’t just making a return on investments, but making a return on the timeline of the investor. Whether it’s favoring short-term gains at higher risk levels or letting investments sit for years, passively generating money, there’s a portfolio composition that reflects those needs.
The key is knowing how to compose a portfolio that reflects the goals of the investor. Learning the ins and outs of portfolio management is your best chance to get there.
Enhanced investment decision-making
When you use portfolio management principles, you start to understand investments as both singular entities and a greater whole. You’ll see how each individual piece comes together to create the portfolio that balances risk and reward through diversification.
Alignment of investments with personal goals
The portfolio should always match the values of the individual.
Mostly, this means that the asset allocation should reflect the risk tolerance and investment goals of the individual. But portfolio management goes beyond that.
Investing also allows individuals to support the industries and initiatives they care about while achieving their financial goals. An example of this is the emergence of environmental, social, and governance (ESG) investing, investments that are socially conscious based on meeting certain criteria.
With portfolio management, you get the best of both worlds: financial returns while supporting the businesses that align with your values.
How portfolio managers get paid in 2025
Portfolio managers spend so much time working with their clients’ money, but they also need to care about their own. That’s why when they want to be paid quickly and securely, they use BILL.
BILL uses automation to quickly turn a billed amount into a sent invoice, with automatic follow ups so you’re not chasing down unpaid amounts. The less time spent chasing money, the more time you have to manage it.
Reach out for a demo to see how BILL could save you both time and money on billing clients.
