Managing a portfolio of investments is a demanding task for a common investor. The stakes are high when deciding on a suitable investment portfolio. Improper appropriation of funds and failure to sufficiently diversify your portfolio can have disastrous results. Portfolio managers provide investors the opportunity to remain aware of the trends in different financial markets and help them in making the right decisions related to their investment mix. Portfolio management helps in making the right decisions at the right time which maximizes return.
Diversification is the key to greater returns and safer investment plans. This involves avoiding the mistake of ‘Putting all the eggs in one basket’. Every investor is naturally inclined to look for greater returns but the common investor can underestimate the associated risks of a particular investment. There are generally two types of risks associated with financial markets, market risk and specific risk. Market risk in layman terms means the risk of the entire market crashing. This is virtually impossible and this type of risk cannot be diversified away. Specific risk is the risk involved with a particular firm or company going bankrupt. This is something that can be reduced by means of diversification.
Essentially the role of the portfolio manager is to diversify the portfolio. A common investor is not familiar with the functioning of the market and the true value of stocks and bonds. The portfolio manager acts as an intermediary at times in helping 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 dealing in stocks such as buying newly issued equity, a sign of financial vulnerability of any firm.
A financial manager you hire to develop your portfolio helps in making the right investment mix on a wider scale. This involves appropriating the right proportions to risky and risk-free investments. The manager helps you in deciding how much to invest in money market securities and how much to put in stocks and bonds. A common investor is not able to determine the right mix and usually takes this decision based on his or her inherent degree of risk aversion.
Formulating your portfolio with the help of a reliable manager has other advantages in addition to the greater probability of getting more returns on your investment. For a common investor, the services of a portfolio manager help him in learning the tricks of the trade over a period of time. The investor becomes familiar with the functionality of the market and the right ways to go about when making investment decisions. So in the long run, he or she can indulge in business independently without needing the services of any professional.
Total reliance on portfolio managers has its drawbacks. The ‘self interest’ factor can hamper your investment goals especially when dealing with a portfolio management company. However for the average investor, the advantages of a portfolio manager override such drawbacks and it is always advisable to have a consultant to help you manage your investment portfolio.
