Managing an investment portfolio is a demanding task for a common investor. The stakes are high when deciding on a suitable investment portfolio. The misappropriation of funds and the lack of sufficient diversification of your portfolio can have disastrous results. Portfolio managers provide investors with the opportunity to keep abreast of trends in different financial markets and help them make the right decisions related to their investment mix. Portfolio management helps to make the right decisions at the right time, which maximizes returns.
Diversification is the key to higher returns and safer investment plans. This involves avoiding the ‘Put all your eggs in one basket’ mistake. Every investor is naturally inclined to seek higher returns, but the average investor may underestimate the risks associated with a particular investment. In general, there are two types of risks associated with financial markets, market risk and specific risk. Market risk in simple terms means the risk of the entire market crashing. This is practically impossible and this type of risk cannot be diversified. Specific risk is the risk involved in the bankruptcy of a particular business or company. This is something that can be reduced through diversification.
Essentially, the role of the portfolio manager is to diversify the portfolio. A common investor is not familiar with how the market works and the true value of stocks and bonds. The portfolio manager acts as an intermediary at times to help the investor purchase the correct securities. With the help of a proper financial manager, the investor can avoid certain mistakes that other people make when trading stocks, such as buying newly issued shares, a sign of any company’s financial vulnerability.
A financial manager you hire to build your portfolio helps you create the right investment mix on a broader scale. This involves appropriating risky and risk-free investments in the right proportions. The manager helps you decide how much to invest in money market securities and how much to put in stocks and bonds. An ordinary investor cannot determine the right mix and typically makes this decision based on their inherent degree of risk aversion.
Formulating your portfolio with the help of a trusted manager has other benefits besides the increased chance of getting more returns on your investment. For a common investor, the services of a portfolio manager help you learn the tricks of the trade over a period of time. The investor becomes familiar with the functionality of the market and the correct ways to proceed when making investment decisions. Then, in the long run, he or she can go into business independently without needing the services of any professionals.
Total reliance on portfolio managers has its drawbacks. The ‘self interest’ factor can get in the way of your investment objectives, especially when dealing with a portfolio management company. However, for the average investor, the benefits of a portfolio manager outweigh such drawbacks and it is always a good idea to have a consultant to help you manage your investment portfolio.