Investment portfolio management
AN INVESTMENT portfolio is a collection of investment assets such as shares and bonds. In this regard, investment portfolio management is therefore the process of selecting an ideal asset mix that generates an optimum return for a given level of risk in line with the underlying investment policy. An investment policy outlines the general investment rules and strategies to be employed in order to meet set objectives. Elements of investment portfolio management Diversification: This is the spreading of risks and returns within a portfolio to reduce diversifiable risks. Diversification is usually meant to capture the returns of all asset classes over time since it is usually difficult to ascertain which particular subset of an asset class is likely to outperform others.
Proper diversification therefore takes place across different securities, e.g. shares, bonds, collective investment schemes, etc.
Asset Allocation: This is aimed at balancing risks and returns by distributing portfolio assets in line with investor’s goals, risk tolerance and investment horizon.
Asset allocation is based on the fact that different asset types differ in volatility. It therefore seeks to improve the risk/return profile of an investor by investing in a mix of assets whose correlation is low.
As a result, aggressive investors can be inclined towards volatile investments while conservative investors can opt for stable investments.
Rebalancing: Investors should strive to realign weightings of their portfolio assets. This involves periodically buying or selling assets in a portfolio to maintain the original desired level. Market movements can expose an investor’s portfolio to greater risks or lower return opportunities.
Hence, rebalancing entails the sale of high-priced or low-valued securities and deploying the proceeds into low-priced and high-valued ones.
Continuous rebalancing at certain time intervals enables investors to stay on track of their investment objectives.
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