What Is Investment Management? A Primer

Posted on July 5, 2013 at 5:22 AM PDT by

Once you begin to save up a little money, the next step is to figure out how to invest it. There’s a strong case to be made for investing in yourself, say through additional education or by starting a business. But most people do at least some investing in the markets, and often they rely on managers to help.

But what is investment management? For most people who invest through 401k accounts at work, investment management takes the form of mutual funds. Behind any active mutual fund there is a lead investment manager and, often, a team of support managers. They pick the stocks or bonds that make up the fund.

what is investment management

You also are likely to get advice from a 401k plan adviser on what proportions of which funds to own. This is yet another type of investment management, since the balance of stocks, bonds and other investment types will, over time, affect your performance.

Since the combination of funds is crucial, many 401k plans try to offer their members a “set it and forget it” option for investment management, often in the form of target-date funds or pre-cut portfolios. In the latter, the measure of stock vs. bond funds is designed to match your age and ability to accept risk.

In the former, the target-date funds, a collection of pre-cut portfolios is built in advance for each stage of an investor’s life. Money is moved automatically from the most risky to the least over the course of several decades. The idea is to completely automate the investment management process.

The problem with these plans is that they can be expensive. Each underlying investment fund has its own fees, in order to pay the managers doing the trading. Target-date funds have costs, too. As investments are bought and sold, there are commissions to be paid, costs which are absorbed by you, the investor. Fund fees cost you real money, and that affects your performance dramatically over time.

What is investment management ideally?

On the flip side, there has been a broad move toward self-directed retirement accounts. These promise investors a chance to control costs, since they no longer limit your ability to invest directly. However, the important component one needs to succeed, actual investment management, is missing. You’re on your own.

What’s the solution? The ideal investment management plan would combine very low costs with an appropriate portfolio mix for the age and time horizon of each investor. Most pension plans, for instance, operate exactly this way.

Increasingly, the major brokerages offer exchange-traded funds (ETFs) with minimal fees and, often, no commission charges. If you don’t have access to a pension manager but do have the ability to pick your own investments, then the challenge is building that mix of investment types yourself while keeping costs low.