Sometimes, investors find themselves in too complicated portfolios, making it difficult for them to Finance Brokerage Forex Beginners manage and handle. Here are some key insights you should take note in order to avoid a portfolio that’s difficult to understand.
Number of Advisors
It’s not rare for some investors to have two or more advisors as well as managing part of the overall portfolio themselves.
This follows the adage that two heads are better than one. Basically, each advisor can give a different perspective with different investing ideas and such a thing leads to multi-advisor accounts.
Without an overall investment strategy to provide the required discipline, having more than one advisor might just complicate the portfolio without really adding to the performance or contributing to risk reduction. And this usually what happens with two advisors that have the same investing mandate.
You can split responsibilities among advisors Forex Broker List if you have more than one. That means each of them should have a specific asset class for which they can be responsible.
Number of Accounts
Without much difficulty, a couple may have several investment accounts. In some cases, the minimum number of accounts between a husband and wife is at least 7.
Now, if some of the accounts are split between different institutions as well as managed by the couple themselves, it’s not uncommon for them the end up with more than a dozen different accounts.
Every account at a different institution will have a different reporting standard, which contributes to the complexity. Keeping a close watch on your investments and determining what investments are put into each account only adds to the administrative burden.
Number of Securities
Each individual security in a portfolio requires some attention. There is somehow mistaken belief by some investors that if investing in one mutual fund is good, investing in maybe 5 will be better.
The goal is to achieve proper diversification with a minimum number of securities instead of just adding more.
A simple mutual fund investing in one asset class, like a large cap equity, fixed income, foreign equities, etc., is relatively direct and straightforward.
A balanced fund that invests across various asset classes or funds of funds add another level of complexity. Many products like hedge funds and PPNs with their embedded options or variable annuities with ther embedded insurance contracts are very difficult to understand by themselves.
The tools and expertise required to effectively understand and manage the risk associated with many of these product is often beyond the reach of the individual investor.
Complex Portfolio Problems
A good balanced fund, particularly one that is balanced internationally, may be a good choice if your portfolio has just one to two funds. However, a portfolio that contains six to 10 balanced funds rarely makes for good investment.
This is because these additional funds just add complexity without further diminishing risk or enhancing performance.
Diversification to a point is always a good attribute, but over diversification should be avoided. Portfolios that are overdiversified with too many mutual funds will usually underperform after the fees are deducted.
You should consider the individual characteristic of an individual security as well as the potential impact on the overall portfolio.