Investing is a lot like playing a good card game, or trying to win at chess. If you're not using strategy, you're probably not going to win. It sounds scary to think about, but everyone who has ever actually won big in the stock market has employed successful portfolio management strategies to make their money.
Finding good investment strategies isn't that hard. You don't have to be a Wall Street guru to strategize well. Here are some of the most common types of strategies you can use to manage your portfolio—even if you don't know how to invest like Ray Dalio.
First, let's talk about what portfolio management really is, shall we?
There are a lot of different ways that you can work with your investments. There are different types of investment diversification, different types of investments to choose from, and there are also different portfolio management strategies.
When we're saying portfolio management, we mean tending to our investments in a way that lowers risk and maximizes rewards. This is done by looking at all the perks and pitfalls of a certain investment, then determining whether it's a good buy for your particular needs.
When you manage your portfolio correctly, you're able to match your investment goals to investments that would make it most likely to happen.
The most common type of portfolio management is Active Management.
A lot of portfolio management strategies fit under the "Active Management" umbrella. With actively managed investment portfolios, the person who's managing them will do what they can to beat the market. This means they will typically...
- Be very "hands on" with their approach. Active managers will typically spend quite a lot of time analyzing stocks, buying them, selling them, and keeping up with stock market news. This is not one of the strategies lazy investors will want to try.
- Use quantitative analysis to figure out their moves. Math is the name of the game with Active Management. They will often spend tons of time just trying to learn ratios and values before they drop a dollar on stock.
- Diversify their portfolios. Lowering risk means that diversification is a huge portion of your management strategy.
Is Active Portfolio Management right for you?
Though it may be the most popular of all portfolio management strategies, Active Portfolio Management definitely isn't for everyone. How effective this strategy is, is almost entirely based on how skilled the portfolio manager is.
Active Management is not good for you to try if...
- You get freaked out from the smallest fluctuations in stock. Emotional investors will not fare well with Active Management. You will very likely panic sell stocks the moment that they dip. That's not a habit of successful and happy investors, by the way.
- You're new to trading and managing your own portfolio. Though it is possible to make great decisions while just beginning to start investing in the stock market, it's not very likely. You may want to try a different approach or let someone do it for you.
- Your track record sucks. Though past performance is not a guarantee of future failures, we'd suggest that you take it as a sign that you shouldn't manage your own.
Passive Portfolio Management
If you love the "set it and forget it" route, you'd be great with Passive Portfolio Management. These types of portfolio management strategies are all about meeting the market, rather than beating them. They work under the belief that the price of a stock will correct itself over time—and that the market will continue to grow.
Most Passive Management strategies will mean that you will...
- Invest heavily in index funds and other similar funds. Index funds and other multi-stock funds are a way of reducing risk through diversification while keeping pace with the market's growth.
- Probably just let fund managers do the work. You won't be very active in Passive Management. Fund managers will do most of the work for you, and will manage all the turnaround in your portfolio for you.
- Work on the very long term rather than short term. If you want to day trade, this is not going to be one of the better portfolio management strategies you'll want to look into.
- Avoid checking your portfolio very frequently. This is a good option for people who want to put in minimum effort when it comes to maintaining investments.
Is Passive Portfolio Management right for you?
People who love a "laissez faire" type of investment portfolio management will love Passive Management. This is a great choice for beginners who are not looking for extreme growth, want to minimize risk the old fashioned way, and want to avoid panic sales.
On the other hand, Passive Management isn't good for everyone. If any of these things ring true, you may need another style...
- You dislike index funds, ETFs, and other multi-stock investment routes. If you love having full shares of stocks, you might find Passive Management to be aggravating.
- You want to day trade. That's way too active for something as passive as this. Get the best apps for day traders instead.
- You want to have complete and total control over your portfolio. Since this form of management involves using professionally managed funds to do the work for you, this isn't really doable with passively managed portfolios.
Defensive Portfolio Management
Defensive Portfolio Management is one of the best portfolio management strategies for people who feel like a recession or bear market is right on the horizon. This is an ultra-conservative kind of portfolio that's more about loss prevention than it is about gaining profit. A lot of investors who choose this strategy do so temporarily, often right before a recession starts.
If you have a defensive portfolio, then you will probably...
- Invest primarily in government bonds, low volatility stocks, CD ladders, as well as other investments that are notoriously safe. High risk is something you just won't see in a defensive portfolio. Defense and asset protection are the primary focal points here.
- Won't see very high returns, compared to a more aggressive method. It's not about getting high returns with this type of portfolio. It's about preventing loss during a bear market.
- Will focus on stocks that produce necessities, rather than luxuries. During times of hardship, necessities end up being the stocks that retain the most value—not luxuries. If you choose Defensive Management, you're going to avoid having luxe names in your portfolio.
Is Defensive Management right for you?
Defensive Management is not for everyone—unless, of course, you're in a bear market or are really worried about asset loss. That being said, it's definitely not a strategy for everyone.
If any of the following statements ring true, you might want to avoid this management style.
- You want to beat the market. Nope! If you're looking for high growth, you're going to want to look at other portfolio management strategies.
- You're cool with risk. Risk-averse people are the ones who will enjoy Defensive Management the most.
Aggressive Portfolio Management
High growth, risk-taking, and making the most of the ever-changing market is what Aggressive Management is all about. Aggressive portfolio management strategies are all about taking risk and maximizing profits, realizing you might incur extra losses as you chase your goal.
People who choose an aggressive strategy will typically...
- Look for high volatility stocks, or riskier alternative investments. A person who's aggressive will not typically shy away from the most dangerous investments you can make.
- See loss as inevitable from time to time. This is the opposite from Defensive Management, simply because you embrace loss and hope that it'll average out.
- Research investments heavily before making a decision. Just because you're willing to take a risk doesn't mean that you'll do it willy-nilly. The phrase "look before you leap" still applies.
- Actively use risk management strategies to help curb losses. Just because loss is inevitable doesn't mean it can't be reduced. Successful aggressive investors tend to realize this and work to reduce loss via a wide range of methods.
Is Aggressive Management for you?
Most portfolio management strategies are designed to be more conservative than an aggressive portfolio would be. Generally speaking, people who do well with aggressive management would vehemently disagree with the following statements:
- You are new to investing. If you're new to investing, you should not try to be aggressive. Newbies typically will suffer major losses when they try this kind of strategy.
- You're very risk-averse and are prone to emotional investing. Aggressive investors are ones who embrace risk. If you're prone to panicking, making bad decisions, or hate risk, this is not the strategy for you.
- You're older. Older people should reduce risk in their portfolios, since it will be harder to recover the losses they incur.
- You will be investing with money you can't afford to lose. You should never do this anyway, but with aggressive investing techniques, it's even worse.
Income Portfolio Management
The final category of portfolio management strategies we will discuss is called Income Portfolio Management, and it's a strategy that focuses on increasing dividend yields. Dividends are small cash payouts that companies give shareholders on an annual or bi-annual basis.
With this form of portfolio management, investors work to increase dividends, which turns into a fixed form of income in time. Income Management investors will look to find as many ways to get distributions and steady income as possible.
People who are into Income Management will typically...
- Invest in dividend-rich stocks, REITs, and moderately risky investments. Growth plus a steady rate of income is the goal here, which is why investors choose these types of investments.
- Use their investments as a complement to retirement funds. This management style is all about bolstering income, which makes it great for investing for your old age.
- Are mostly interested in utilities and other similar kinds of companies. Income Management is a more "slow and steady" type of strategy.
- Want to have steady, guaranteed income. This is true, even with bar market moments, for Income Management fans.
Is Income Management right for you?
Income management is a great option for people who love "middle of the road" investment strategies. These kinds of portfolio management strategies tend to work well with almost everyone. Even so, some folks might find them to be underwhelming.
If any of the following ring true, you might want to avoid investing using these types of strategies.
- You're looking for extreme growth. Income Management won't give you extreme growth. Rather, it offers moderate growth with a lot more defense.
- You're not willing to look into a variety of different stocks to find good dividend yields. Research is still mandatory with Income Management.
- You want a "get rich quick" solution. It's not going to happen with Income Management. This is a very moderate style of investing, and if you're not alright with being patient, it's not going to bode well for you.