The Different Activities in Managing a Portfolio


Managing a portfolio of assets is an essential task for any serious investor. This is because, portfolio management is both science and art that helps in making decisions on matters concerning investment mix and policies or strategies to adopt, aligning investments to the objectives, asset allocation strategies as well as balancing risk against performance. It goes without saying that the activities of portfolio management are so elaborate and needs sharp minds if at all wealth is to be maximized in a significant way (Artzner, 2000).

Thesis Statement

Portfolio management is a very critical emerging trend in the business hemisphere which has sparked great discussions and debates in the last decade. All the workshops and forum which have attempted to analyze it have not attained a consensus point. This paper presents an element of portfolio management with an examination of asset management, optimization, and evaluation. It is a risk level that drives any amount of expected returns; this, therefore, makes investing to involve risk management that even return management (Linter, 2006). This makes a portfolio manager to be concerned at examining practical implications that appertain risk management where asset allocation is involved.

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Risk Management Strategies

A portfolio manager should focus on coming up with risk management strategies that may broadly be classified as follows in the following section.

Risk Transfer Strategy

Transferring risk is usually used to shield or cushion an investor from taking unnecessary risks that could be beyond control due to its nature. Use of insurance and other investment vehicles may allow possible transfer of risk usually at a price to another investor who is willing to bear third party risks as far as investment is concerned.

Asset Allocation

Asset allocation refers to the process of deciding how to distribute wealth among various asset classes, sectors or even countries for investment purposes (Lintner, 2006). This is a critical part in selecting proportions of the investments to be made.

Portfolio Selection

It is important to select a portfolio well so that it maximizes returns at the lowest risk levels possible. In selecting portfolio for an investor, it is important to conduct individual investor cycle. An individual investor cycle may briefly be described in phases as follows:

Accumulation Phase

This is the basic and beginning levels for an investor in case they begun early to invest. It comprises the period of early to middle years of careers. The desire during this time is usually to make attempts at satisfying intermediate and long term goals if able to (Artzner, 2000). When looking at the net worth of the individual it is usually small due to financing needs such as cars and expensive electronics. Others could be repaying college loans which may be heavy a reason why they are left with little incomes if any. At this phase, usually, the long-term investments imply that they are willing to take moderately high risks so as to see if they can make above average returns. It is advisable to start investing at this stage for the sole purpose of doing so is to have a compounding effect on the returns thus higher total returns at advanced later stages.

Consolidation Phase

This stage is usually past midpoint of one’s career. It is assumed that by this time usually the debts are settled and if remaining just a small part that can be repaid within a short period of time. If this is the case, then the investor or person has earnings that exceed normal living expenses to enable them to invest the surpluses. However, we observe that the investor still prefers moderately high-risk investments as they appear attractive to them whole at this stage. This is because the individuals at this stage are focusing on capital preservation as they don’t want to take large risks that may make them be in danger of losing all they have made so far.

Spending Phase

This phase is presumed to begin at retirement age. These are the people who have spent their years saving and thus right time to spend it. The living expenses at this stage can be covered by social security schemes and other investments the person made in prior period investments. The emphasis on preserving capital is gone, however, there is a desire to keep pace with inflation so that the investments do not lose significant value (Michaud, 2010). This stage is characterized by a need to change the mindset from saving then to spending, which sometimes may not be easy.

Gifting Phase

This is the last stage and it may be concurrent with the spending phase. During this time, an individual should have saved enough to cater for current and known future expenses and still remain with a reserve for uncertainties (Linter, 2006). At this level, if the resources are sufficient enough, individuals can use excess assets to provide gifts to others and even donations to institutions. It is also important for proper estate planning for taking care of tax considerations among others.

The Portfolio Management Process

This is a vehicle that helps an investor in achieving his investment goals. It may comprise the following steps if at all it is to be useful:

  • A portfolio manager should construct policy statement
  • Studying current financial conditions and forecasting future trends
  • Constructing a portfolio
  • Monitoring needs and conditions that affect the portfolio

The portfolio management process This is a vehicle that helps an investor in achieving his investment goals. It may comprise the following steps if at all it is to be useful:

  • A portfolio manager should construct policy statement
  • Studying current financial conditions and forecasting future trends
  • Constructing a portfolio
  • Monitoring needs and conditions that affect the portfolio

Policy Statement

A policy statement helps an investor to understand his or her needs better and assist investment manager in managing clients’ portfolio. It should outline objectives of investment as well as Investment constraints that will affect any set classes of assets (Lintner, 2006). The following section will discuss the details of investment objectives and investment constraints.

Investment Obiectives

This is where the investor specifies return and risk objectives or goals that affect his portfolio selection. A portfolio manager ought to consider risk tolerance of the investor. When we look at the risk tolerance or ability to assume certain levels of risk, we see that this is affected by a number of factors to mention individual psychological makeup, family status such as married or single and even age to mention a few. It is important that return goals are made to be consistent with the risk tolerance of that particular individual. It is also noticed that risk tolerance changes with time resulting from changes in our portfolio right from the mix up to the asset classes. The following are identified as possible goals when one wants portfolio of asset:

Investing for Purpose of Capital Preservation

This is usually for the purpose of maintaining the purchasing power of an individual. An investor, therefore, wants to leverage risk of loss of value of his assets making a portfolio manager focused on minimizing the risk of loss (Michaud, 2010). It forces the portfolio manager to perform such that the returns are no longer less as compared to the rate of inflation in the economy of a particular country where the investor is or has invested.

Investing for the Purpose of Current Income

An investor is concerned with income as opposed to capital appreciation or gains that can be made. These investors want to, therefore, use investment opportunities that are able to supplement their current incomes so that they cover their day to day living expense. This is most suitable to an individual at the “spending phase” who could be retirees as they are seeking relatively low risk.

Investing for the Purpose of Capital Appreciation

An investor whose objective is to have capital appreciation is focused at growing portfolio in real terms with time so as to meet future needs as opposed to current consumption. Portfolio growth is made possible through capital gains. This objective is on long-term time horizon making the investors take a greater level of risk as there is much uncertainty.

Investing for the Purpose of Getting Total Return

An investor in this category does not consume current income but rather reinvests if back in the portfolio selected so as to make more returns. Therefore, we observe that an investor who falls in this category wants the portfolio to be growing with time so as to meet far future needs through capital gains and reinvestment of the current income (Fabozzi et al, 2007). They may be said to be of the moderate risk since they do not want to choose assets that are a too risk for them.

Investment Constraints

A portfolio manager needs to know the investment constraints that an individual investor is limited to. This is so because investment constraints have an impact on investment choices. When managing or designing a portfolio, a portfolio manager needs to consider the following while making investment decisions:

The Liquidity Needs

This refers to when soon the assets can be converted to cash. In the context of investing, we need to know how soon the money of an investor will be needed during the investment period.

The Time the Horizon

The time is essential in making an investment decision. The portfolio manager needs to know how long an investor is willing to invest his money. This helps determination of the period of investing in such as bonds that span over a year to several years ahead (Fabozzi et al, 2007). When an investor prefers short time horizon then more liquid and less risky investments are appropriate. Legal and regulatory factors These factors may limit the investor especially in the choice of investments to make. Legal restrictions often constrain decisions e.g. insider trading. An investor should consider this since it may affect the choices to be made.

Legal and Regulatory Factors

These factors may limit the investor especially in the choice of investments to make. Legal restrictions often constrain decisions e.g. insider trading. An investor should consider this since it may affect the choices to be made.

Tax Issues

In some countries, they impose taxes on the returns on investments. If an investor wishes to buy bonds, he or she may realize that there may exist taxable as well as tax-exempt bonds. We should also look at the fate of realized capital gains and ordinary investment income whether it is affected by the tax.

Unique Needs and Preferences

We may have investors who due to personal reasons or upbringing not prefer certain types of investments (Rockafellar and Uryasev, 2014). This will limit the investment options from which to choose our portfolio. For example, we may have an investor who does not like alcohol or tobacco stocks to be included in their portfolios due to their belief in certain ethical reasons. Study current financial and economic conditions and forecast future trends This is paramount or rather important as it helps in determining strategies that should meet goals within the expected environment. This requires monitoring and updates because financial markets constantly change ever.

Constructing the Portfolio

If we have an elaborate policy statement, then this construction of portfolio becomes easy since we have all the expected conditions concerning the investment. This will be more of allocating available funds in asset classes chosen and securities both from home country and abroad if at all there is that kind of arrangement agreed on. The portfolio manager should conduct this stage with an investor is a point of view in mind.

Monitoring and Update of the Portfolio

The portfolio manager should be regularly checking investor’s needs and capital market conditions. This is important since there could be changing financial and economic conditions in the market. In light of changes that affects our portfolio, a portfolio rebalancing may be done and in some instances even revise policy statement where there are significant changes that have arisen. This is important to be considered especially after evaluation of portfolio performance and comparing it to expectations and possible requirements that are listed in the investor’s policy statement (Michaud, 2010). After everything is looked at, then modification of the portfolio investment is done accordingly.


A portfolio manager should be concerned with valuing financial assets such as marketable securities like stocks, options, an enterprise or sometimes intangible assets like patents and trademarks. We may then say that it is a process of assessing the value of company or assets that one has in his portfolio. This is usually done prior to the purchase or sale of an asset. Asset valuation may be based on cash flows, comparable valuation metrics or transaction value. However, it should be noted that both subjective and objective measurements may be used and not necessarily relying on financial statements.


  1. Lintner, J. (2006). The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets. The review of economics and statistics, 13-37.
  2. Michaud, R. O. (2010). The Markowitz optimization enigma: is’ optimized’optimal?. Financial Analysts Journal, 45(1), 31-42. Rockafellar, R. T., & Uryasev, S. (2014). Optimization of conditional value-at-risk. Journal of risk, 2, 21-42.
  3. Fabozzi, F. J., Kolm, P. N., Pachamanova, D. A., & Focardi, S. M. (2007). Robust portfolio optimization and management.
  4. John Wiley & Sons. Artzner, P. (2000). Applebaum, D. (2004). Lévy Processes and Stochastic Calculus (Cambridge University Press).
  5. Artzner, P., Delbaen, F., Eber, J.-M. and Heath, D. (1997). Thinking coherently, Risk 10, pp. 68-71. Risk, 10, 68-71.


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The Different Activities in Managing a Portfolio. (2023, May 02). Retrieved from