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The Pros and Cons of Portfolio Management

Capital Markets CIO Outlook | Tuesday, October 13, 2020

Portfolio management offers investors a suitable framework and various evaluation models to accurately determine how much returns they want and how to get it.

Fremont, CA: Individuals and institutions often face the issue of deciding how to invest for future needs. It might be to fund retirement needs for individuals or fund future liabilities in the form of insurance claims for insurance companies. For investors, it is the question of whether they should analyze and invest in each security in isolation or take a portfolio approach (analyzing individual securities regarding their contribution to the entire portfolio.)

Some of the pros of portfolio management are:

Helps in Avoiding Disasters

Portfolio management helps investors prevent disastrous results that arise from investing in a single security. Investors should not invest in just one security but expand their portfolios.

Helps in Reducing Risks

Disasters are uncommon compared to volatility in the securities market. However, it is crucial to avoid disasters, and diversification acts as a shock sponge for a volatile market.

Optimal Allocation of Funds

Portfolio management can help investors with limited funds to invest and maximize their returns. It offers investors a suitable framework and various evaluation models to accurately determine how much returns they want and how to get it. This structured approach makes it simple to distribute limited funds ability and put it to use.

The cons of portfolio management:

No Downside Protection

Although portfolio management helps in minimizing downside risk, it does not offer extensive downside protection. During downfall or crash, it becomes outdated because there is no strategy in portfolio management to prevent such scenarios.

Risk of Over-diversification

Over-diversification happens when each investment lowers risk and also lowers the expected return when adding individual investments to a portfolio. A portfolio needs to be diversified until a stage where unsystematic risks become reduced. Most times, investors face the risk of over-diversification, lowering returns for the invested money.