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When you make smart investment options for your personal portfolio, it tremendously impacts your ability to increase your wealth. But there is no specific ‘one size fits all’ approach toward investments. This is mainly because people have different goals and the ability to tolerate risks, but they also have different preferences for managing their investment portfolios. So, you need to understand your options to help determine the best fit for you. 

Now, let’s take a look at some portfolio management strategies with a wide range of investor objectives to help you decide whether you prefer a more hands-on or hands-off approach to manage money.

Portfolio Management Strategies - Table of Contents

Assessing Your Personal Investment Circumstances

There are 4 main factors to consider about your personal situation before you can choose the best portfolio management strategy that suits you: 

  • Your objective: Financial planning is an integral part of your investing process. You need to understand your goals and the bigger financial picture before you employ any portfolio management strategy. This helps ensure that your chosen direction pushes you to where you need to be. 

  • Risk propensity: Risk is something that all investors tolerate differently. It would help to highlight how comfortable you are with the market volatility before you jump into the investment field. 

  • Time horizon: Time is the best feature for any investment. The longer you have the ability to keep your money in the market and ride out any short-term disruptions, the more flexible you are to make investments. 

  • Financial situation: If you are not in debt and do not need any cash for short-term expenses, then you can afford to take bigger risks with your investment portfolio. 

Now that we know the main factors to look into about your personal situation let’s take a look at 3 portfolio management strategies.

3 Portfolio Management Strategies - Aggressive to Balanced to Defensive

1. Aggressive Investing

In the world of finance, the more risk you take, the better returns you get. Aggressive portfolio investing includes examples like filling your portfolio with stocks rather than bonds or buying stocks in upcoming companies where returns are less predictable as they have a shorter track record. These strategies are suited to people with prior experience in investing and whose long-term plans are not derailed by their short-term market experiments. These people also do not watch the stock market closely.

So, let’s say you are young and in the accumulation phase of your life. Then this aggressive investment strategy is perfect for you. Most people who choose this strategy max out their retirement accounts or add to their children’s college fund.

At this life stage, you are more concerned with accumulating money and saving for retirement rather than crunching the numbers to get an exact figure. So, your main concern is to save as much as possible as you will not need the money on a short-term basis. When investing aggressively, the phrase long term means at least 10 years, which is why the aggressive strategy is not feasible if you are saving for short-term buying like your first home.

Aggressive investment helps build wealth but can cause investors to lose sleep. So, consider the risks involved, the time frame, and your financial situation before making any high-risk investments.

[ Related Article: How Does Stock Market Work? ]

2. Balanced Investing

Most investors land in the middle of both aggressive and defensive strategies. A balanced portfolio management is perfect for those who want some long-term gains but also have short-term obligations to fulfill. The term balanced can mean different things to different people, but in the case of portfolio management, it is made of 60% stock and 40% equity or a 50/50 split. So, it would help to look for portfolios that generate a 5-7% return on average over time.

Balanced portfolios hold more aggressive investments in their accounts, such as a Roth IRA. These types of portfolios contain cash and more conservative investment options from which you gain an income.

Most individuals looking for a balanced portfolio are in their 40s and 50s when they think about their retirement plans and their source of income post-retirement. Additionally, you can also get a balanced portfolio for life if it produces enough income to outpace your expenses.

3. Defensive Investing

Defensive portfolio management is on the opposite side of the investment spectrum. Some examples include cash and bonds that provide a predictable investment experience and that put you in a better position to achieve a specified rate of return within the set time. 

For example, let’s say you experience a sudden change in your life, like a serious medical condition. You can feel more secure when you pursue a defensive investment option for the time being while you get back on your feet. In contrast to the aggressive investment stage, defensive strategies are best for those who plan to withdraw money and do not want to take too many risks. But any investment tends to fluctuate in value as it is not cash, so there is no guarantee in return. Still, defensive portfolio strategies see fewer fluctuations than other options in the present market. 

It is important to remember here that the decision to build a defensive investment portfolio should be based only on your thought process or short-term market direction. A decision needs to be made based on what is best to suit your requirements and life situation. 

Investors who want more stability in their investment portfolios should consider defensive strategies. But remember, your gains will not be as high as the proactive strategies.

3 Portfolio Management Models - Active to Factor-Based to Passive

1. Active Investment

Once you know whether you want an aggressive or defensive investing option, it is time to think about how to manage your portfolio. Active portfolio management models involve the payment of analysts to oversee your portfolio, deciding which stocks to hold or to let go of, how much risk can be taken, and buying or selling stocks accordingly. 

The value proposition of this strategy is that despite the added costs associated with active money management based on personal hours, the portfolio manager can provide returns that you would only get if you worked with them. 

2. Factor-based Investment

Also known as smart beta investing, this type of investment strategy was started in the 1960s when academics tried to understand what drives market returns and whether they could use those details to help drive investment decisions. The research took place in the 80s and 90s when institutional investors started implementing it when they found that certain stocks performed better over longer periods of time. 

For example, small brand stocks outperformed their larger brand counterparts. Understanding this, factor-based investment advisors can decide to own smaller stocks in their portfolio in such a way so that they have a diversified investment plan. Because they do not have to understand the nuances of each company, factor-based investment advisors can help deliver this type of investment cost-effectively. But, there are no free trade-offs in investment, so there will be long periods where the investment in smart beta funds needs to be fixed.

Ultimately, it would be best if you believed in your money managers so that they can deliver the best. If this is not working out, then focus more on index investing.

3. Passive Investment

Passive investment models appeared 40 years ago from the debate measuring the effectiveness of active money management. For example, index investing involves aiming to replicate the performances of broad market indexes like the S&P 500. This enabled investors to avoid any additional costs associated with the active management of their portfolio. 

If you want the market to do the work and mitigate the impact of higher fees and taxes, then lean towards an index investment style. 

Final Thoughts

When planning your investment portfolio, you should always remember the saying ‘do not put all your eggs in one basket’. A diversified management strategy will help ensure that the success of your portfolio is not based on one investment. While diversification will not get you the highest gains nor prevent losses, it will, however, smoothen out the rough edges of your investment portfolio. 

The more diverse your portfolio, the more you minimize your company-specified risks.

About Author

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Founder & Managing Director of Investor Diary

I, Vishnu Deekonda, am dedicated to providing the proper financial education to every individual interested in becoming financially independent through intelligent investments.

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