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Portfolio Management Basics

Portfolio Management Basics 

Portfolio management refers to the stewardship of an individual’s investable assets in the form of bonds, shares of companies, cash, etc.  This process is undertaken with the intent to maximize profits relative to the amount of risk taken.  Ideally, a portfolio should be managed under the guidance of an experienced and credentialed portfolio management team.

Successful portfolio management is the means by which end goals such as retirement are achieved.  These end goals help direct a suitable investment plan formulated by a financial planning team.  In that plan, an individual’s income, budget, age, ability to accept and capacity for risk are considered. For example, someone in their 20s will have a completely different financial plan than someone due to retire in five years.  Time-horizon, inflation, income needs, and sensitivity to volatility must be determined in each person’s situation.

A few of the key components to effective portfolio management are listed below:

Asset Allocation/Mix

Asset allocation refers to the mix of asset classes in a financial portfolio. Asset allocation is based on the concept that different types of assets perform differently in ever-changing economic environments.  Low correlations among the asset classes in a portfolio add stability.  The basic example would be stocks and bonds.   Typically, government bonds offer a safe alternative to stocks, which can be volatile at times.  Whether the mix of assets is chosen using an active or passive approach, the objective is the same; a portfolio should be constructed with your financial goals in mind.

Diversification & Rebalancing

Diversification is simply the idea of not holding all your eggs in one basket.  Optimizing the sector, issuer or geographic exposure in each asset class helps to dampen risk.  A concentrated portfolio within one area of the market, or one stock, can lead to unpredictable results. Rebalancing refers to periodically reassessing the sector weightings to ensure that you are still on track with the original asset allocation that was laid out in your financial plan.

A professional money management organization should be wholly transparent about portfolio management decisions.  Actions taken on your behalf should be backed by sound logic and a driving focus on achieving your individual financial goals. 

 At Mader and Shannon, we believe that an effectively implemented active management strategy can help clients achieve reliable upside participation while also providing excellent downside protection.  By dampening the volatile swings in the market, our strategy seeks to provide both a sustainable long-term rate of return as well as peace of mind to our clients.

For more information about portfolio management with Mader Shannon, call (816) 751-0585.