4 key elements of a well-managed investment portfolio

Fund management, portfolio management, active and passive management, unfortunately, wrongThose involved in the investment field are familiar with the management. But what does “management” in the general sense mean, and what is its specific relevance in the investment environment? This is a very important question, but it is rarely (if any) raised.

John Schermerhorn wrote in his book “Management”: “Management is the process of planning, organizing, leading and controlling the use of resources to achieve goals.”

Decomposing the process into the above four standard elements is the key to understanding the meaning of fund management. Any investment process must involve planning, organization, leadership and control to a certain extent before it can be considered managed. However, any one of these four elements can be done well or badly, and this will affect returns.

Key points

  • Good management is the process of planning, organizing, leading, and controlling the use of resources to achieve goals.
  • In the context of portfolio management, there are fewer planning and organizational issues, but investors often ignore leadership and control.
  • In order to solve this problem, investors can pay more attention to monitoring, controlling and adjusting the combination of different types of investments in their investment portfolios.

Investment management and general management

The definition of investment management is quite different from the definition of general management. For example, portfolio management is defined as the art and science of investment portfolio and policy decisions, matching investments with goals, personal and institutional asset allocation, and balancing risk and performance. This is a very specific definition of management in the investment environment.

However, the four cornerstones of integrated management still apply to investment and are clearly reflected in the definition of portfolio management. Nevertheless, investment managers and investors tend to underestimate or even ignore one or more basic general management principles, which is very dangerous.

However, for investors, planning and organization are less likely to be overlooked than leadership and control. Control, especially the weakness of management investment, is also the real Achilles’ heel of many investments.

Leadership and control: danger zone

What makes investors so susceptible to poor leadership by investment managers and the influence of their capital control is that investors usually surrender their capital after planning and organization are completed. Therefore, what is often overlooked is the leadership and control of these investments.

If in the strict sense, there is never really an intention to manage funds, and investors know this and even want it, then there is no problem. But if people think they are actively managed, and Believe that this will protect them from the market and volatility, the lack of effective management can be catastrophic.

Similarly, from a legal point of view, the promise of active management creates the impression of strong and effective loss control, which may (reasonably) lead to a damage award in court. The fundamental difference between active management and passive management unique to the investment field illustrates the nature and inherent problems of the problem.

Active and passive management

It is important for investors to understand the difference between active and passive investment management. Active managers rely on analysis, research, forecasts, and their own judgment and experience to make investment decisions about which securities to buy, hold, and sell.

In contrast, passive management means that the fund’s investment portfolio is only meant to reflect market indexes. In other words, the fund can only fluctuate up and down with the market. There is no attempt to pick “good” stocks and avoid “bad” stocks.

In the investment industry, the management methods of passively managed funds are still limited.Nevertheless, in the general management sense, passively managed investments are indeed United NationsManagement, understanding this is very important.

Similarly, funds or portfolios that have never been rebalanced or controlled are also unmanaged and are therefore called “closet trackers.” Given that failures in active stock selection are very common, there is certainly nothing wrong with this so-called passive management, as long as there is no hint or promise of more.

What can be done?

Given the dubious benefits of active investment management in stock portfolios, passively managed funds are definitely cheaper than actively managed funds and may perform better over time.

However, if done well, what can and does be effective is to actively manage the portfolio in terms of asset allocation, rebalancing, and loss control tools. Most experts agree that the investment portfolio is optimized by monitoring, controlling and adjusting the combination of different types of investments (asset classes) in the portfolio. In other words, active management of diversification is not only worth doing, it is also essential.

What is more controversial is the use of stop-loss orders and the use of derivatives to control losses. In the context of this article, it is important that such management is possible, although its effectiveness is another matter. Furthermore, speculation and excessive trading to generate commissions are positive, but it will only burn investors’ money and is of no use.

The degree of portfolio management is not as important as people getting what they want, expect and have promised. In addition, they need to understand the effectiveness of management.

Bottom line

It’s up to you whether you want to try your luck or let others try their luck to manage your funds. Similarly, you may or may not believe in stop losses and other methods of optimizing stock portfolios. However, what (almost) everyone needs and wants is for the entire portfolio to generate the best possible return.

No portfolio should simply grow on its own like an oak tree; you can choose to tame it in any way you like, as long as you are satisfied with the results.


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