Business

Investment portfolio managers: the pros and cons

Managing an investment portfolio is a demanding task for an ordinary investor. The stakes are high when deciding on a suitable investment portfolio. Improper appropriation of funds and a lack of sufficient diversification of your portfolio can have disastrous results. Portfolio managers give investors 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 you make the right decisions at the right time, which maximizes performance.

Diversification is the key to obtaining 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 common 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 that the entire market crashes. This is practically impossible and this type of risk cannot be diversified. Specific risk is the risk involved in the failure 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 buy the right 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 develop your portfolio helps you create the right investment mix on a broader scale. This involves appropriating the right proportions to risky and risk-free investments. 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 correct mix and typically makes this decision based on his inherent degree of risk aversion.

Formulating your portfolio with the help of a trusted manager has other advantages besides the increased likelihood of earning more returns on your investment. For a common investor, the services of a portfolio manager help you learn the tricks of trading 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 the need for the services of any professional.

Total reliance on portfolio managers has its drawbacks. The ‘self-interest’ factor can get in the way of your investment objectives, especially when you are dealing with a portfolio management company. However, for the average investor, the advantages of a portfolio manager outweigh those disadvantages and it is always advisable to have a consultant to help you manage your investment portfolio.