Investment Portfolio Management 101

F inancial portfolio management requires the ability to balance opportunities and threats, along with strengths and weaknesses from across the entire spectrum of investments. Selecting the best investment and portfolio management tool involves trade-offs, including debt vs. equity, domestic vs. international, and growth vs. safety.

Key takeaways:

  • The main goal of investment portfolio management is maximizing anticipated investment returns while maintaining an acceptable risk level.
  • There are two types of investment portfolio management: active and passive.
  • Key elements of investment portfolio management include asset allocation, diversification, and rebalancing.
  • Investment portfolio management software and apps help investors and portfolio managers effectively manage investment portfolios.

Understanding Portfolio Management

Image via Pixabay by Audy0073

Some people opt to build and manage their own stock portfolios, while others look to professional investment portfolio managers. Either way, an investment portfolio manager’s ultimate goal is maximizing the anticipated return for investments within an acceptable risk level exposure. Investment portfolio management can be either active or passive in nature.

Active Investment Portfolio Management

Investors implementing an active investment portfolio management approach try to outperform specific indexes such as the Russell 1000 Index or S&P 500 Index using brokers or fund managers to purchase and sell assets.

Actively managed investment funds can have a team of managers, co-managers, or a single investment portfolio manager actively making decisions for the fund. An actively managed fund’s success depends on several factors, including the investment portfolio manager or management team’s expertise, market forecasting, and in-depth research.

Investment portfolio managers need to pay close attention to news affecting companies, political landscape changes, economic shifts, and stock market trends. They use this information to time the buying and selling of investments trying to take advantage of irregularities. Active investment portfolio managers claim these processes help increase potential returns above what is typically achieved simply mimicking a particular indexes holdings.

Attempting to beat the stock market does require an investor to have a higher risk tolerance level. You can eliminate this particular risk by indexing as it removes possible human error related to stock selection.

Investors also trade index funds less frequently, meaning that they are more tax-efficient and incur lower expense ratios than actively managed funds.

Passive Portfolio Management

Passive portfolio management is also known as index fund management. This type of investment portfolio management looks to duplicate the returns of particular benchmarks or market indexes. Passive portfolio investment may be structured as a unit investment trust, an exchange-traded fund (ETF), or a mutual fund.

Investment portfolio managers purchase the same assets that are shown on the index, using the same percentages they have within the index. Index funds are known as passive management since managers simply replicate indexes rather than selecting securities to buy and sell.

Passive funds or portfolios generally have far lower management fees than active management strategies.

Key Elements of Portfolio Management

Investment portfolio management is the science and art of choosing and monitoring a collection of investments that meet investors’, companies’, or institutions’ risk tolerance and long-term financial goals.

Asset Allocation

The key to effectively managing investment portfolios is establishing a long-term mix of assets. Typically, this means certificates of deposit or other cash, bonds, and stocks. This can also include alternative investments, including derivatives, commodities, and real estate.

When determining asset allocation, it’s important to understand that the various types of assets don’t move in concert, with some being more volatile than others. Having a diversified portfolio, or a mix of assets, helps protect investors against risk while providing balance to the portfolio.

Traders having more aggressive profiles weigh their portfolios toward investments like growth stocks that have more volatility. Traders seeking a more conservative profile typically weigh their portfolios toward more stable investments like blue-chip stocks and bonds.


Investing has only one certainty: It’s impossible for investors to predict winning and losing investments consistently. The prudent approach is creating a portfolio of investments with broad exposure within a class of assets.

Diversification is spreading reward and risk within an asset class. Since it’s difficult to know which part of a sector or asset class will likely outperform the other, diversification looks to capture the returns of all sectors over time, reducing volatility along the way.

Real diversification is made across several classes of geographical regions, securities, and sectors of the economy.


Rebalancing is done when investors want to return their portfolios to the original target allocations. This is done at regular intervals, typically on an annual basis. Investors use rebalancing to reinstate the portfolio’s original asset mix when stock market movements force the portfolio out of kilter.

For instance, an investment portfolio starting with 60% equity and 40% fixed-income allocation may, after an extended market rally, move into a 70/30 allocation. While the investor may have made a nice profit, the portfolio is now at a riskier level than the investor is comfortable with.

Rebalancing usually involves selling high-value assets and putting those funds to work in out-of-favor and lower-priced assets.

By annually rebalancing their investment portfolio, investors can capture gains while expanding growth opportunities in high potential sectors while maintaining a portfolio with the original return/risk profile.

Investment Portfolio Management Software

Managing investment accounts is no easy task. Between taxable investment accounts, health savings accounts (HSAs), individual retirement accounts (IRAs), and employer 401(k)s, this can result in investors needing to manage multiple investment portfolios.

Juggling several accounts can be difficult and comes with significant challenges, including establishing an asset allocation plan covering individual investments — monitoring performance involving signing in to various accounts to aggregate the information.

One way to effectively do this is to use an app or software to manage the process. Below are some examples:

1. Personal Capital’s Free Financial Dashboard

Personal Capital’s financial dashboard is easy to set up by opening a free account and then linking all of your financial accounts to its platform. This can include 401(k)s, individual retirement accounts, taxable investment accounts, credit card accounts, and bank accounts. Your financial data is then aggregated by Personal Capital’s dashboard to provide analysis and a wealth of information, including:

  • Classifying your investments between taxable and retirement accounts.
  • Displaying your investments by individual holding or by account holding.
  • Tracking the performance of your investment over time while comparing your returns to various benchmarks.

Personal Capital can also organize investments by asset class using these investment categories:

  • Alternatives.
  • Cash.
  • International bonds.
  • International stocks.
  • U.S. stocks.

In addition to sorting and aggregating your investment and account information, Personal Capital has tools to provide insight into the fees you’re paying, your retirement investments, and an investment checkup reviewing the overall allocation of your assets.

2. Morningstar’s Portfolio Manager

There are several differences between Morningstar’s Portfolio Manager and Personal Capital’s financial dashboard. The most noticeable difference is that you need to enter all of your investments into Morningstar’s Portfolio Manager tool manually.

While more time is required to enter your investment account information into Morningstar’s Portfolio Manager, the analysis this tool provides makes the extra effort worth it. This investment management portfolio tool gives you basic information about each of your investments, including its percentage weight in the overall portfolio, daily changes in value, and its current price.

Morningstar also provides information on the portfolio’s overall performance along with your portfolio’s monthly and annual return while comparing it to benchmarks chosen by you. What really sets Morningstar apart, though, is its Instant X-Ray feature.

Instant X-Ray provides you with detailed information regarding your portfolio’s asset allocation while showing you your portfolio’s investment style box for both bonds and stocks. Your investments are broken out by region, stock type, and sector while showing you your portfolio’s weighted average mutual fund expense ratio. Finally, it illustrates the percentage each investment has within your portfolio’s entirety. This information may be particularly helpful if you invest in mutual funds.

Morningstar offers both free and paid membership options, and its portfolio monitoring tool is available with either option.

Whether doing investment portfolio management on your own or with the help of a professional investment portfolio manager, it’s important to balance threats and opportunities with investment strengths and weaknesses. Understanding what goes into investment portfolio management can help you make the right decision for your investing future.