An investment portfolio contains an assortment of investments held by an investor. Investment portfolios can include various financial instruments, also known as securities, such as shares, bonds, mutual funds and cash. Investors have the option to manage their portfolios themselves or to assign the portfolio management responsibilities to private bankers.
Investors who enjoy managing their own portfolios can open accounts with discount brokerage firms and benefit from the lowest trade commissions on the market. Seasoned investors who enjoy trading securities benefit most from this type of brokerage service since discount brokerage firms do not provide investment advice.
Conversely, investors who prefer receiving investment advice and delegating the task of trading securities benefit most from the services of a full-service investment firm. High net-worth individuals usually hire portfolio management firms to cater to their specific financial needs. These types of firms usually develop customized products for their clients and manage their investment portfolios from A to Z.
Whether investors enjoy managing their own portfolios or prefer delegating the task to financial professionals, it is important for them to know the three most important characteristics of a good investment portfolio.
1. Cost efficient
A good portfolio is cost efficient, which means that a portfolio should have minimal costs in relation to its returns. The costs of maintaining a portfolio should not hinder the performance of a good portfolio. Costs, such as trading fees, should be kept in check in order to maximize the effective returns of the portfolio. It is crucial to optimize the marginal cost of managing the portfolio in order to create a cost efficient portfolio.
2. Risk efficient
A good portfolio is risk efficient, which is different from being risk-free. A portfolio becomes risk efficient when properly diversified. Diversification reduces risk by allocating investments amongst various securities and industries. Since various financial instruments react differently in the face of diverse events, a well-diversified portfolio has a lower risk than a portfolio without diversification. A risk efficient portfolio offers the lowest amount of risk for the highest possible returns.
3. Tax efficient
A good portfolio is tax efficient, which is different from being tax-free. The asset allocation of the portfolio should be set up in a tax-efficient manner, which means the after-tax returns of the portfolio should be maximized. Different components of the portfolio are taxed at different rates. A good portfolio is mindful of such discrepancies and allocates its assets in such a way as to deliver maximum after-tax returns. Therefore, a good portfolio focuses on maximizing after-tax returns rather than maximizing pre-tax returns.
In conclusion, an optimized investment portfolio is cost efficient, risk efficient and task efficient. Investors can either try to build such a portfolio on their own or delegate the task to professionals. The ultimate goal of a good investment portfolio is to maximize returns.
It is important to note that the financial information provided in this blog is for informational purposes and not for the purpose of providing specific investment advice. You should contact a financial advisor to obtain specific advice tailored to your financial needs. Financial advisors, along with brokers and dealers, must be registered with the securities regulator in order to sell securities or to offer investment advice.
Moreover, it is essential to remember that all investments are subject to risk. It is possible to lose the invested sums of money and these losses can surpass the invested amounts. Past performance does not guarantee future results.