Financial portfolio management refers to the management of portfolio that comprises of financial assets like stocks, bonds and cash. The financial portfolios are usually held by individual investors and managed by banks, hedge funds, financial institutions, or financial professionals.
The financial portfolio is designed as per the risk tolerance, investment objectives and time frame of the investors. The risk/reward ratio of the portfolio is influenced by the dollar amount of each asset. It is also known as asset allocation of the portfolio.
Financial portfolio management comprises of asset allocation and rebalancing because the investment world is very dynamic. With rapid changes taking place over time, one can see the one sector becoming less favorite than other sector and vice versa. Thus, only an agile investor can make huge profits by the stock markets around the world.
Those investors who have expertise in financial markets can side step the losses and place their portfolios for the foreseeable bull market. It allows them to maintain their portfolio even as the stock markets plunge in cruel bear markets around the world.
The active financial portfolio management can lead to wealth building by considerable overweighting and underweighting various investment sectors such as mentioned below.
· Precious Metals
· Stock sectors
The value of the asset may rise or fall in comparison to other assets in the economy depending on various factors such as strength of the currency, inflationary or deflationary environment and economic conditions. When there is exchange of services between two persons or businesses for cash in a certain currency then person/company receiving the cash, takes an asset that can be used for procuring other assets.
Factors that lead to rise or fall of the stocks of individual companies
· General economic conditions
· Geo-political considerations
· Company performance
Assets like stocks, Bonds, commodities and others, exhibit lifecycle of rise and fall depending on the various factors as mentioned above. The value of these assets fluctuates relative to other assets with the dynamic changes taking place in the market.
Asset allocation involves investing a certain percentage of money in each of these assets over the period of time. It helps in continues building of portfolio and allows it to grow in one sector or another. The investment scenario is very dynamic while many asset allocation models are static in their approach.
The percentage of a particular sector in the portfolio will increase when it outperforms other sectors. For example, if commodities outperform stocks and other sectors than its percentage in the portfolio will increase.
In order to make good wealth and profit from the dynamic markets one has to nimble and amply overweight oneself in sector with bull market and underweight in other sectors. At a given point of time, there is usually a bull market in one sector or another. This strategy helps the investors to ride all the way up in the bull market. One should not follow the idealized asset allocation model and remain active by overweighting and underweighting in various sectors depending on the bull run and other market conditions.