Portfolio Management Explained

In this article, we'll explain what a portfolio manager is, what they do, why you might want one, why you might not, and how to find one if you do.

Disclaimer: We offer portfolio management services. That said, this article is meant to be educational and objective in nature.

Dog managing a portfolio

What is a portfolio manager?

A portfolio manager is someone that manages assets in a portfolio.

But what is a portfolio?

A portfolio is any mix of assets such as:

  • stocks
  • bonds
  • real-estate
  • art
  • gold/metals
  • etc.

In the traditional sense, portfolio managers mostly deal with equity (stock) and bond holdings for clients.

What does a portfolio manager actually do?

Well, here's where things get a bit tricky. A manager's job is simply to do something with your investment assets. If he or she makes investment decisions for you or with you, the manager is, well, managing your portfolio.

Pretty open to interpretation, huh? It's also a very low bar to "doing the job."

What if you were a mid-level HR manager, and all you had to do to meet your duties was to "manage" some humans in some way, shape, or form, with no real oversight as to what actually got done?

What if you were a president, and to be paid and considered successful in your job, you had to simple "preside" over something?

So in simple terms, a portfolio manager must do something.

A sloth

What does a GOOD portfolio manager do?

good portfolio manager does one thing, and only one thing. He/she gets you a good return on investment. 

Unfortunately "good" is subjective, so finance geeks create lots of jargon to define "good." This includes gems such as:

  • Sharpe Ratio
  • Sortino Ratio
  • R-Squared
  • Traynor Ratio
  • Jensen's Alpha
  • and my favorite, the Modigliani-Modigliani Ratio (why stop at just two?)

Just for fun, check out the definition for R-Squared:

"R-squared (R2) is a statistical measure that represents the proportion of the variance for a dependent variable that's explained by an independent variable or variables in a regression model." 

Is it any wonder that average investors get intimidated and ask for outside help?

A good portfolio manager delivers risk-adjusted alpha

Simply put, alpha is excess return over a similar investment (benchmark is the hip term). Risk-adjusted means that the risk taken to achieve that return is taken into account. So we take two investments, make the risk equal, and compare the returns. If one is better, that one has "alpha."

Good managers deliver consistent alpha.

Why might you want a portfolio manager?

There are two reasons to hire a portfolio manager:

  1. Risk-adjusted alpha
  2. Peace of mind

Risk-Adjusted Alpha

This is just a fancy way of saying "A better return on investment, and more money in the bank later."

If you're curious what a small change in returns can do for you, check out our post on compound interest.

If you're curious what's possible in terms or larger changes in returns can be, check out our webinar on hedging risk.

Peace of Mind

Many people don't have the time, energy, or desire to manage their own money. They know it should be growing, but they are too busy to figure out how exactly that should happen, and would rather hand the reigns to someone that knows what they are doing.

Giving over control means taking that worry off the table. It gives peace of mind.

Why might you NOT want a portfolio manager?

There are two reasons to avoid hiring a portfolio manager:

  1. If you are interested in managing your own portfolio
  2. If you want to invest passively in index funds

You are interested in managing your own holdings

Hats off and good luck. Most stock-pickers, even professional ones, fail to beat the benchmark (usually the broad market). Many people enjoy the challenge and the thrill of stock picking, and some are successful, but most lag the benchmark.

It's a tough game that can (and does for some) pay off handsomely.

You want to invest passively in index funds

We could do a whole post on what passive investing is, but in short, it's "buying the market."

If you want to buy the market, you don't need a portfolio manager. You need to read a short book on executing orders, set up a brokerage account, and put the order through and ignore it for a while. You don't need a portfolio manager to assist with that. Given the fees, it's a HUGE cost to you with very little benefit.


How do I find a portfolio manager?

Almost the same way you find a good landscaper, painter, or accountant. You ask around, do some research, and meet with the manager to ensure the vibe is right and the relationship feels good and the individual or firm feels trustworthy. 

These days, your options are nationwide with digital firms. Gone are the days of going into an office to sign paperwork. Do it all digitally from the comfort of your home, but it's still important to have a face-to-face (digital) meeting with your manager. 

Some questions to ask a potential money manager:

What are your specialties?

  • A good manager will specialize in something. Could be a sector, an industry, risk management, distressed credit, etc. Red flag to anyone without a specific niche. No one knows everything. Good managers know what they know and know exactly what they don't know.

What type of clients do you work with?

  • A good manager will also have a typical client that he/she understands well. It might be pre-retirees, it might be mid-cycle investors, it might be real-estate tycoons, and it might be trust-funders. A good manager tends to understand his/her investors well and have a niche.

What are your thoughts on risk?

  • A good manager will ALWAYS aim to protect capital first and foremost. Most managers will tout diversification as an adequate response to risk. It's not. Ask about other ways managers deal with risk. Red flag to a manager that can't answer the risk question.

How did you handle 2008/2020/etc.?

  • Getting a sense of how a manager handled a previous market event, such as March of 2020 or 2008 as a whole will give you insight as to what you might reasonably expect in the future. Red flag to a manager that mentions weathering a storm or diversification. Diversification didn't help a bit in either scenario.

Etc. Remember, you're interviewing the manager to find out how responsible they are going to be with your money. Are they reckless? Sincere? Aloof? Unprofessional? Likeable? Rigid? Creative? Client-centric? Etc. etc. etc.

Need a portfolio manager?

Look no further.

We offer portfolio management services to qualified clients.

Feel free to book a time to discuss your needs and learn how we can help to minimize your rik and maximize your returns.