Portfolio Management Research Paper Starter

Portfolio Management

There are many reasons for investing. Some investors do it for a living while others pursue it as a hobby. Some invest for a quick return while others look for long term benefit. All investors large and small engage in some type of portfolio management. Portfolio management is how an investor decides what to do with the collection of investments under the investor's control. The management of an investment portfolio is driven by the skill and knowledge of the investor, the opportunities available to that investor, the goals of the investor and the investor's response to economic activity and investment performance. There are a number of strategies an investor may use to manage a portfolio and a number of tasks to maximize portfolio management. All of this starts with goals and continues with investor education. Although many portfolio managers and investment advisors are available, the individual investor must exert control over how investments are managed. Adjustments to a portfolio may take place because of changing objectives or may depend on where the investor is in his or her life cycle. Risk also determines what moves an investor will make. Often, investors close to retirement will look to build portfolios and limit risk.

Keywords Asset Allocation; Diversification; Investment Objective: What the investor hopes to gain by investing.; Portfolio; Portfolio Management; Risk averse; Risk


When we think of a portfolio we think of a folder or collection of related items. If you are an artist, you might have a portfolio or collection of your works of art. Many professionals in many fields create portfolios that represent who and what they are and what they can do. Professional portfolios can be useful for professionals whether they are teachers, graphic artists, speakers, managers, technology professionals and so on. A financial portfolio is the collection of financial investments and in essence the financial position or situation for an individual or a company. This means that you include liquid assets like cash as well as real estate, stocks and bonds, 401K plans and insurance. Your portfolio considerations also include credit liabilities and can impact your ability to acquire new investments.

Companies may also have cash or real estate or stock as investments. However, they may often have different goals than individuals. Instead of personal security, companies may have objectives based on the company stakeholders. Another difference between individuals and companies is that a company may be able to afford a team of specialists who analyze investment options and performance. Individuals may have a professional financial advisor or may simply do the best they can on their own. An investment company is one that will manage the funds of investors based on the investor's objectives for a fee to manage the funds.

Activities Included in Portfolio Management

Managing your portfolio includes deciding what is in the portfolio, what to keep, what to acquire next and how to leverage what you have to get other investments. A simple portfolio decision for an individual might involve changing the asset allocation in a 401K plan, to move away from investment in international stocks to other investments, based on the performance of the investment and how much risk the investor is willing to allow. Joshi (2007) quoted a financial planner who felt that many people just follow what they see or hear instead of having a goal they can stick to and pursue relentlessly. Without a specific goal and strategy, individual investors may be frightened or wiped out by any crisis situation. A crisis may signal a need for a change in strategy but not necessarily a move away from objectives. Sticking to a goal requires patience and if you don't know why you are investing, it will be difficult to achieve your goals with the ups and downs in the marketplace.

Many investment plans offered to employees regularly provide information to the individual investor as to what the performance is of certain investments and may even include a 'sure thing' fund that may have a guaranteed performance level. These funds have a lower rate of return but typically less risk. Smaller, individual investors may prefer these funds because it is less likely that they will lose money on the investment. In addition, if someone is expecting to work for a period of years for one employer at a specific income-level, that individual can almost predict what amount of money the investment will grow to over time.

Small Investor Pitfalls

There can be pitfalls related to the patience of the small investor. Joshi (p. 149 - 150) interviewed a financial consultant who noted that the small investor is often not looking at the investment for the long term such as a period of 5 — 10 — 20 years. Also, the small investor may have unrealistic expectations as to where the investment may grow over time. It is unlikely that a stock that has performed a certain way and yielded a certain percentage of income over the last 10 years will dramatically increase that income unless specific, unforeseen world changes occur. Dramatic changes also don't continue forever. The small investor may also want to use a strategy called diversification where the investments are balanced in such a way to limit the risk of the investors. If you invest too much in one thing, the entire investment is jeopardized if the single investment plummets. This can be disastrous to most average workers who spend an entire lifetime working to support themselves and their families in the hopes of living comfortably in old age. For example, the workers at Enron, who had money invested in Enron stock, saw their lives change dramatically after the collapse of the company. As the stock rose, employees nearing retirement could dream of possibly retiring early, paying off debts and investing in items they may have always wanted.

Unreliability of Portfolio Management

Portfolio management can be described as both art and science because while experience is helpful in determining what makes a good investment, there are incidents and situations that cannot be anticipated. War, natural disasters, inflation, new inventions, company failures, industry changes and rumors can all impact the value of an investment. What constituted a perfect investment at one point might be a terrible investment at another time. For example, one part of the country may be an excellent investment for real estate. The land may be cheap and resold at a higher cost. The community may be a desirable one to live in. However, after the prices rise past a certain point, the investment may not make sense because the resale value may be lower. Improvements in the community such as highways and airports may cause additional congestion which may make it less desirable to live in and more difficult to sell.


Portfolio management is a difficult task for the average individual investor because the investor may not possess a solid foundation of financial skill and education. Often financial advisors are simply people trying to make a living at advising others in the area of finance and may not possess a high level of skill in investing. The individual advisor doesn't necessarily have access to the best financial minds. Even with a financial advisor at your side, no matter how good, the buck stops at the desk of the investor.

In addition to seeking professional help, the investor must also become a student of finance and understand how investments work. This is a distasteful task for some and simply boring for others. The earlier in life that an individual learns about finance, managing money and investing, the more likely it is that the individual will take ownership in investing. Besides ownership and initiative, the investor must be able to make decisions. These decisions should be driven by a sound set of financial objectives. The investor should have some reason for investing and be able to ask the right questions to determine what outcomes are desired from investing.

Investment Considerations

Some life situations may drive an investor's desire to invest. If the individual has witnessed difficult situations in their families due to loss of employment, illness or other situation, they may be very motivated to plan for the care of their families and themselves in old age. Benzoni, Collin-Dufresne, & Goldstein (2007) explored the connection between the investor's age and the makeup of the investor's portfolio. Investors have to consider their age and the amount of time they have to invest because investing is a long term activity and assets only provide real return over the long haul. When individuals become parents they may have a desire to provide for the care and education of children and feel investing allows them to plan and take control of the future financially.

Cane (2007) found the complications in the job of the financial advisor when the investment portfolio objective included caring for a family member with a disability. This is especially true if the disabled member is a child since the parents may not live long enough to personally manage the financial...

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