Have you ever heard of portfolio management? It is an extremely important process when we have decided to invest. Good portfolio management will help you achieve success more easily. So what is portfolio management? How to manage a good portfolio? In today’s article, I will answer all your questions. Let’s go!
What is portfolio management?
Portfolio management is the entire process by which an investor begins to plan in detail, building a portfolio of stocks, bonds, investment funds… to achieve financial goals such as buying a house, traveling around the world or retiring comfortably. A well-managed portfolio will help to diversify risks and achieve long-term goals such as buying a house, raising children, and retiring.
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Advantages of portfolio management for individuals and institutions
If you don’t manage your portfolio well, your finances can also be at risk and not generate the expected profits. Here are some specific benefits when you manage your own portfolio:
- Invest smarter: learn more about each of your investments, thereby making informed decisions that are in line with your financial goals.
- Keep a close eye on your portfolio: always keep track of your portfolio’s performance, know which ones are generating good profits, and which ones need adjusting.
- Create disciplined investing habits: Regular portfolio management will help you form the habit of investing regularly and persistently.
- Ensure liquidity: always make sure you can easily sell part of your portfolio for cash when you need money urgently
- Balance risk and return: allocate investment capital to many different types of assets to minimize risk and maximize return.
- Financial independence: Instead of entrusting your assets to others to manage, you will be the one to actively decide your financial future.
Processes of Portfolio Management
To be successful in investing, we need to build a detailed investment plan. The same goes for portfolio management, which includes the following steps:
Set clear goals
First, you need to understand who you are, what your risk tolerance is, and what you want to achieve from investing (for example, profit, safety, or both). Based on your understanding of yourself, you will build a specific investment plan with clear goals for time and profit. Next, to know if you are on the right track, you need to set criteria to evaluate the effectiveness of your investment portfolio.
Diversify your investment portfolio
You can invest in stocks, bonds, investment funds, real estate, etc. Allocating investment capital to different types of assets will help minimize risk. The types of assets in your investment portfolio should be related to each other to complement each other.
Build and Monitor
Based on your plan and the assets you have chosen, you will build your investment portfolio. You need to closely monitor the performance of your investment portfolio and compare it with the criteria you have set. The market is always volatile, so you need to be ready to adjust your investment portfolio when necessary.
There are two main approaches to building an investment strategy:
- Active investment strategy: Investors will actively look for high-return investment opportunities, regularly buying and selling to take advantage of market fluctuations.
- Passive investment strategy: Investors will choose index funds or ETFs to track a specific market index (for example, VN-Index). This approach is based on the assumption that the market is efficient and that beating the market is very difficult.
Security analysis and investment action
Security analysis is the process of researching to understand a specific stock. It helps you answer questions like:
- What industry is this stock operating in?
- Is this company doing well?
- Is the current stock price reasonable?
- What are the risks of investing in this stock?
There are two main ways to analyze a stock:
- Fundamental analysis: Focuses on evaluating the financial situation of the company, such as revenue, profit, cash flow, etc.
- Technical analysis: Focuses on analyzing price charts to predict the future trend of the stock.
Make a portfolio
After you have carefully analyzed and selected suitable stocks, you will proceed to buy those stocks. This is an important step to turn your investment plan into reality.
Portfolio implementation includes:
- Determine the number of stocks of each type you will buy
- Choose the right time to buy, maybe when the market is down or when there is positive news about the company.
- After buying, you need to monitor regularly to evaluate the effectiveness of the portfolio and adjust if necessary.
Modify and evaluate the portfolio
The market is always fluctuating, companies also change, so your portfolio also needs to be adjusted to suit the new situation. To evaluate the portfolio effectively, we should perform the following steps in sequence:
- Regularly review the portfolio to evaluate the effectiveness of each investment.
- Change the ratio between asset classes (stocks, bonds, cash…) to suit your goals and risk tolerance.
- Sell stocks that are no longer potential and buy new stocks with better prospects.
Challenges of Portfolio Management
Project Portfolio Management (PPM) may sound complicated, but in reality it is like running a small business within a large company. And like every business, PPM has its own difficulties and challenges:
Data
Businesses today collect a lot of data, but do not always know how to make the most of it. Using incomplete, inaccurate or infrequently updated data will lead to poor decisions. When data is scattered and not well organized, finding information becomes difficult.
Poor project prioritization
Many projects are selected based on the personal opinions of leaders or relationships, with no clear criteria for evaluating and comparing projects. This causes projects that bring long-term benefits to the business to be overlooked for short-term benefits.
Poor risk management
Many people tend to ignore risks or underestimate the level of risk. When risks occur, businesses do not have a timely response plan.
Lack of clear governance
Different departments in the business do not work together effectively, no one is responsible for the success or failure of the project or each project is managed in a different way, which can cause the business to lose out in unexpected situations.
Common Portfolio Management Strategies
Managing a portfolio is like steering a ship. There are many ways to steer that ship to its destination, and each has its own advantages and disadvantages. Here are three main approaches:
Active Management
Managers will constantly look for the best investment opportunities, buying when prices are low and selling when prices are high. They are like professional traders, always looking to “beat the market”.
Passive Management
Instead of trying to beat the market, passive managers believe that chasing the market will bring better results. They often invest in index funds, which track a specific market index (e.g. VN-Index).
Discretionary Management
Investors will leave all decision-making power to professional managers. The manager will build a portfolio that suits the investor’s goals and risk tolerance.
Non-discretionary Management
Investors and managers make decisions together. The manager will make suggestions, and the investor will have the final say.
Conclusion
In conclusion, portfolio management is a complex process that requires effort and commitment from all members of the organization. By recognizing, having a management strategy and knowing how to address the challenges shared in the article, businesses can increase the likelihood of project success and achieve business goals.
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