Portfolio management strategies could be aggressive or defensive. The balanced approach of having a good mix of both works well in all times. In order to strategically align portfolios to the market cycles, investors must link portfolio management with both the returns.
Another key parameter of a balanced portfolio management strategy is the diversification of the portfolio. A well-diversified portfolio comprises both low risk low-return fixed income securities like government bonds and bank deposits, and high-risk high-return securities like equity and mutual fund investments. Some hedging instruments like derivatives and insurances may also be held.
A diversified portfolio will also typically include a good mix of investments in and development of capital markets by adopting hybrid approaches that mix elements of active portfolio management strategy of the top-down and bottom-up models.
A) Top down approach - The top down approach looks at the market as a whole first, and then determines which industries and sectors are likely to do well given the current economic cycle. Once the sector choices are made, then specific stocks are selected based on which companies are likely to do best within a particular industry.
B) Bottom up approach - In the bottom up approach, the investor ignores market conditions and expected trends. Instead, companies are evaluated based on the strength of their financial statements, product pipeline, or some other criteria. The idea is that strong companies with achievable growth charts are likely to do well no matter what market or economic conditions prevail.
Alternately, investors may choose to follow the passive strategy of investment. Passive asset management is based on the concept that markets are efficient and therefore there is no way one can consistently outperform the market. One should move with the indexes, minimize the cost of investment and hold the investment for the long term to procure the best investments in precious metals, real-estate, money market investments, cash etc.
Diversified portfolio management strategy allows investors to actively control one portion of their portfolio by adopting different investment strategies; and allow the other portion to grow naturally. However, the portfolio size must be fairly large for adequate diversification. So in a volatile and uncertain market, investors may play defensive and stay invested in low risk low return portfolios till the economic cycle reverses itself. Or if they have the risk appetite and the courage to do, may make the most of the situation of uncertainty, identify opportunities to exploit fully, take calculated risks and come out winners through adversity. The best investment strategy is finally to understand the cost and risks of each investment program and have your own portfolio driven by your decision hierarchy and risk appetite.
