What are the most important concepts in financial portfolio management?

Man with portfolio

A financial portfolio means a group of investments made on behalf of either an individual or a company. The investments that typically make up such a portfolio range from bonds and stocks to cash, commodities and property. Portfolio management refers to the work of identifying suitable investments in the first place and then keeping track of how each one is performing to make sure that they are meeting the expected returns.

It is something that requires real knowledge and awareness of the different markets. That is why most people use professionals in portfolio management from Chester or wherever they happen to be based to handle it. These professionals will understand the underlying concepts, and it is those that we will be looking at in this article.

Portfolio Management: Risk and Return

At the heart of the management of an investment portfolio is making sure that the risk and return characteristics of the different investments are aligned with the goals of the client. Therefore, the first thing that a portfolio manager should do is to find out what the purpose of the exercise is: whether it is to provide additional financing for a company or to secure an individual a comfortable retirement nest egg.

Once that has been established, the client should be asked to answer some questions that will determine their tolerance of risk as well as the sort of returns they are hoping for. This will enable the financial advisor or whoever will be in charge of the portfolio to find investments that fall within the right risk/return range.

Following that, it will be a case of working out the capital market expectations (CMEs) for the various asset classes that will make up the portfolio. The CMEs are what the expected risks and returns for each of these asset classes are and are either calculated by the portfolio management professional or drawn from an outside source. They will enable the manager to figure out how each asset should be allocated.

Asset Allocation

The next key financial portfolio management concept is the actual allocation of the assets. The level of returns and risk that the client is comfortable with will be one of the factors that determine how the different assets that make up the portfolio are allocated, but it is not the only one. Other influencing factors will include the needs of the individual or business when it comes to cash flow/liquidity in the here and now; the amount of time that will be involved; and their tax situation.

The person responsible for managing the portfolio must be aware of the correlation between the asset classes and the individual investments. That means how closely related they are to each other. In terms of correlation, -1 means perfect negative correlation and 1 means perfect correlation. For example, if an investment bond always goes down in value by 1% when another rises by 1%, amounting to perfect negative correlation.

Correlation is a very important part of the whole asset allocation concept, because it can help determine the risk level. Choosing investments that provide differing performances will make the overall portfolio less volatile and lower the risk. Risk can be mitigated by the portfolio manager investing across multiple asset classes that have low correlation.


This is the next important portfolio management concept and ties in with asset allocation. Making investments across different asset classes rather than just domestic stocks will keep the risk level lower than it would otherwise be. Diversification also helps to ensure that, if one investment fails to produce the sort of returns that were hoped for, another one can potentially make up the deficit.

This is always a possibility – even with professional portfolio management – because investing can never be an exact science.

Tax Mitigation

Creating an investment portfolio that is designed to minimise the tax liabilities of the client is another really important concept behind it. One of the reasons why most people choose to have their portfolios managed by financial professionals is because these people have a good overview of the tax system and will know how to make investments that can legally reduce a client’s tax burden.

Monitoring and Rebalancing

Finally, there is monitoring and rebalancing. This means keeping track of how the different investments are performing and can include making changes if any of them are not producing the desired results. It is important to note, however, that the performance of the investments within each asset class should be judged on the basis of the targets laid out by the client, not just on their returns.

The overall aim will be to ensure that the portfolio remains stable and that it is on course to meet those targets.

These are the important portfolio management concepts. Speak to a professional for more detailed information.

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