Using the right strategy for your investment portfolio is a sure-shot way to financial freedom. This plan helps you generate the best investment returns. The key is to have an investment portfolio that reflects your investment choices and helps you grow your finances. Various types of portfolio management strategies might seem overwhelming initially, but there are reasons for them. In this guide, you will learn to make the correct portfolio strategies. Moreover, if you are a beginner, consider these tips to diversify by learning “what is portfolio strategy”. What are strategies to be followed by a portfolio manager to optimise investment returns and manage risk effectively? Find out below.
8 Types of Portfolio Management Strategies
- Active Portfolio Strategy
When you, as an investor, choose active portfolio management, your goal is to beat the benchmark returns of your investments. This hands-on approach adjusts your portfolio so that it outperforms the general stock market.
An investor who follows such types of portfolio management strategies must be frequently active in the market. Not just that, they also need to make trades frequently.
Investors try to identify mispriced and undervalued stocks and invеst in thеm for maximum rеturns. It is thе bеst stratеgy for risk-takers in thе stock markеt. Your portfolio managеr will guidе you on thе typеs of investments you should sееk, but thе final call is yours.
- Passive Portfolio Strategy
The second one on this list of types of portfolio management strategies involves buying and holding stocks. Investors do not frequently deal with them to avoid higher transaction costs. Your portfolio manager will tell you that it is impossible to outperform the market due to its higher volatility. Therefore, in such cases, choosing passive strategies makes it less risky.
Contrary to active management, passive portfolio strategies and management have lower costs. This is a hands-off strategy that does not involve regular buying and selling of the securities. The goal is to not outperform a specific index or the whole market. Passive investments want to mirror the returns of the index. It is an effective method for cost-efficient investors.
- Aggressive Portfolio Strategy
There are other types of portfolio management strategies for risk-taskers as well. This strategy implies that the investment technique maximises the returns by taking a relatively higher risk. This happens when the investor wants to invest in expensive stocks that provide great returns.
The primary focus of this type of investment is capital growth. It comprises stocks from companies demonstrating rapid growth potential, likely to yield substantial earnings in the upcoming years. It’s important to understand that high returns are not a guarantee with all aggressive investments.
- Defensive Portfolio Strategy
As an investor, if you want to focus on steady growth while mitigating risk, defensive portfolio management is the perfect strategy. Such types of portfolio management strategies involve a protection-first approach and then a focus on growth. The investors who avail themselves of this strategy are the ones who are looking for stability and consistency.
With this strategy, you can curate a collection of stocks after observing trends like market returns, earnings growth, and dividend history. Investors are usually conservative about the investments they make.
If you are on the less risky side, then regularly balance out your portfolios with these types of portfolio management strategies to maintain the intended asset allocation. However, it is worth implying that a defensive strategy always does not result in steady growth.
- Diversification is Also a Strategy
A fundamental principle of portfolio management is to diversify your funds. Adding a wide range of securities to the portfolio is an attempt to limit exposure to the fluctuations in any single asset. This is diversification. Your portfolio manager will advise you to have a mix of distinct investment segments that can help you achieve higher returns with low risks.
Having a diversified investment strategy in portfolio management reduces the risk profile of an investment as it spreads out the portfolio over multiple asset sectors or classes. The main goal of this type of investment is diversification. Through diversification, you can lower your portfolio volatility without sacrificing your overall returns.
Such types of portfolio management strategies allow investors to lower their portfolio volatility without sacrificing overall returns. In this manner, you (the investor) can benefit from holding a combination of stocks and bonds, as asset classes have varied performance in varying market conditions.
- Non-Correlating Assets as a Strategy
The risk in the market is like splitting it into two parts. The first part is systematic risk, and the other part is unsystematic risk. Systematic risk is like a risk that’s always there, and no one can control it, not even companies or investors.
On the other hand, unsystematic risk in one of the types of portfolio management strategies is a risk that you can lower by adopting certain practices and methods when it comes to investing. One way to reduce unsystematic risk is to have assets that don’t do the same thing as the market.
Switch-world events can cause a huge rise in the price of one of the two and a dip in the other. So, having both Gold and Stocks with such types of portfolio management strategies can help balance things out when unexpected events happen.
- Balanced Investing
This strategy combines asset classes in a portfolio to attempt to balance risk and return. Typically, this is one of those portfolio management strategies that has two divisions between stocks and bonds: 50-50 or 60-40.
Of all types of portfolio management strategies, this one remains a preferred option amongst investors when there is a moderate risk tolerance for the investments. Your portfolio manager will choose companies that have steady market performance. It is for the best if you balance defensive stocks with aggressive stocks.
This strategy helps to preserve capital through defensive stocks and achieve growth through aggressive stocks. While opting for this investment strategy, investors like you should keep in mind your risk appetite and risk calculations based on past data. Seek help from your portfolio manager to guide you when choosing these types of portfolio management strategies.
Such an investment strategy may comprise investments in government securities, like deposit certificates, long-term bonds, and blue-chip equities. Such investments yield low income but will most likely keep the capital intact.
There are some other factors that you also need to pay attention to. They are management characteristics, product mix, regulatory issues, etc. Also, this strategy should include an estimation of the time for which you are going to hold an investment.
- Dividend Growth Investing
The last one on our list of “types of portfolio management strategies” allows investors to seek out companies that have a history of consistently distributing dividends each year. Such companies are generally considered stable and exhibit lower volatility when compared to others.
Moreover, these companies typically strive to incrementally raise their dividend payments on an annual basis. Investors in this strategy choose to reinvest these dividends, thereby taking advantage of the power of compounding for long-term gains.
FAQs:8 Types of Portfolio Management Strategies in Renewable Energy Asset
What role does risk management play in investment strategies?
Risk management is crucial in investment strategies. It assesses and mitigates various types of risks, which include market, credit, and concentration risks. Diversification, asset allocation, and setting proper stop-loss limits are some of the risk management techniques.
What does a good investment portfolio look like?
A diversified portfolio that meets your financial goals and risk tolerance is a “good” one. Such a portfolio will fulfil your investment goals, spread the risk to other assets, and maximise the returns.
How will the Sustvest portfolio manager help with your investments?
Your portfolio manager will oversee a number of the investments that you make. They can suggest where to invest based on your financial goals. They will suggest investment strategies that maximise your returns.
Which strategy is best for a first-time investor?
Discretionary portfolio management allows your portfolio manager to make investment decisions on your behalf. It is the best option for those who are still learning about the investment market.They will consult with you.
Is diversification important in portfolio management strategy?
Divеrsification is еxtrеmеly important. Invеst in both high-risk and low-risk assеts. Usually, thеy movе in thе opposite direction. This savеs you from incurring a hugе loss.
Choosing the right one from the various types of portfolio management strategies is a crucial step towards achieving financial freedom. Whichever option you opt for, the key is to align your investments with your risk tolerance and financial goals and maximise returns. With the guidance of a skilled portfolio manager at Sustvest, you can navigate these strategies to create a portfolio tailored to your unique financial objectives. Invest in renewable energy projects that help you meet your investment goals.
Founder of Sustvest
Hardik completed his B.Tech from BITS Pilani. Keeping the current global scenario, the growth of renewable energy in mind, and people looking for investment opportunities in mind he founded SustVest ( formerly, Solar Grid X ) in 2018. This venture led him to achieve the ‘Emerging Fintech Talent of the Year in MENA region ‘ in October 2019.