An investment portfolio is a collection of stocks, bonds, financial derivatives, and other assets held by an investor or financial institution. Its purpose is to diversify risk. An investment portfolio can be viewed as a combination of several levels. The first level of combination, driven by the dual needs of safety and profitability, considers the combination of risky and risk-free assets. Risk-free assets are needed for safety, while risky assets are needed for profitability.
The second level of combination considers how to combine risky assets. Since the risk-return of any two assets with poor or negative correlation is greater than the risk-return of each asset individually, continuously combining assets with poor correlation can help the portfolio's efficient frontier move away from risk.
Two Levels of a Fund Portfolio
The first level is the combination of various assets, such as stocks, bonds, and cash, specifically determining the proportions among these different assets. The second level is the combination of bonds and stocks, specifically determining which bonds and stocks within the same asset class to choose and how to weight them.
Investors invest funds in different types of securities, or multiple types of the same type of securities, in a certain proportion. This diversified investment approach is called a portfolio. Investment portfolios can diversify risk, meaning "not putting all your eggs in one basket." This is one of the key reasons for establishing securities investment funds.
Principles
Some fund terms and conditions explicitly stipulate that the portfolio must contain at least 20 securities, and each security must be purchased with a certain percentage limit. As investment funds accumulate over time, they have the power to diversify their investments across dozens or even hundreds of securities. This significantly reduces fund risk.
Core Purpose of Portfolio Management
The primary goal of portfolio management is to maximize investment returns for a given risk level, or to minimize risk for a given expected return. This requires investors to fully consider and manage potential risks while pursuing returns.
Steps in Portfolio Management
- Determine Investment Objectives
Clarify key factors such as the investor's risk tolerance, return expectations, and investment horizon. This is the starting point of portfolio management and forms the foundation for subsequent decisions.
- Asset Allocation
Based on the investment objectives, select appropriate asset classes (such as stocks, bonds, cash, etc.) and determine the proportions of each asset class in the portfolio. Asset allocation is the core component of portfolio management, determining the overall risk level and return potential of the portfolio.
- Select Investment Products
Within the identified asset classes, select specific investment products. These may include individual stocks, mutual funds, ETFs, and more. When selecting an investment product, consider factors such as its historical performance, management team, and fee structure.
- Monitoring and Evaluation
Regularly review your portfolio's performance and make necessary adjustments based on market fluctuations and changes in your personal financial situation. Monitoring and evaluation are important means of ensuring your portfolio continues to meet your investment objectives.
- Performance Evaluation
Evaluate whether your portfolio's performance meets your initial objectives. If not, you may need to review your investment objectives or asset allocation strategy. Performance evaluation helps investors understand how their portfolio is performing and inform future decisions.
Core Concepts of Portfolio Management
- Risk Diversification
Reducing overall portfolio risk by allocating funds across multiple investment products is a core strategy in portfolio management. When a particular investment product performs poorly, the strong performance of other investments may offset the loss, leading to stable growth for the overall portfolio.
- Optimizing Returns
Maximizing returns within an acceptable risk profile is a core goal of portfolio management. By properly allocating assets and selecting investment products, investors can achieve higher returns while controlling risk.
- Risk-Adjusted Return
Return after factoring in risk. This is an important metric for evaluating portfolio performance. It helps investors gain a more comprehensive understanding of the risk and return profile of their portfolio.