If you have a portfolio of stocks and/or bonds, portfolio management services are something for you to consider.
Whether you have a regular brokerage account, a trust account, corporate account, or a qualified account, a target allocation should be computed and considered. TTG Financial utilizes asset allocation models and sophisticated technical tools to construct a target allocation for each investor.
Portfolio management services are a process of choosing the appropriate mix of investments to be held in the portfolio and the percentage allocation of each of those investments.
What does Portfolio Management Services account for?
Portfolio management services is not a ‘one size fits all’ type of service. It takes a lot of characteristics into account such as the investor’s tolerance to market volatility, personal goals and expectations, trends in the stock market and economy in general, and the investor’s general tolerance to risk. The collection of investments selected should be managed with the investor’s risk profile, goals, and time horizon in mind.
What are the key elements of Portfolio Management Services?
- Asset Allocation
- Tax-Efficient Investing
Diversification is the paramount feature of portfolio management services. Diversification refers to selecting a mix of investments that are not correlated to each other or to the general market. Why is this necessary, though; why not just select the investments that are doing well and reap the vast gains? The answer lies in what these investments do when there is an overall market downturn. The reason for having investments with a low correlation to other holdings in the portfolio is to try to protect the entire portfolio from a large loss when this (eventual and unavoidable) downturn does occur.
Here’s a more concrete example: stocks and bonds commonly have a low correlation with each other. In some cases, they are even negative. Because of this, market and economic factors that cause price movements in stocks will have little to no impact on the price movement in bonds. In the case of the negative correlation, the impact will be in the opposite direction.
Over the years, several studies have pegged asset allocation as the key determinant of both the return and volatility of a portfolio. Saying asset allocation is important to portfolio management services may be an understatement. Asset allocation refers to where the investor’s money is put to work in the market. Asset allocation is all about risk management of the mix of assets in a portfolio. This is different from one investor to the next, so the allocation will keep in mind your risk tolerance and personal financial goals.
While asset allocation is a good starting point, it does need rebalancing from time to time. Over time, the actual performance of investment holdings in the various asset classes will perform at different levels. Perhaps small cap stocks will lead the pack for a couple of quarters, but then technology stocks experience a period of relative outperformance. These differing returns, over time, will cause the asset allocation to deviate from the investor’s original target allocation. This can cause the portfolio to assume more or less risk than desired.
Periodically, the portfolio should be rebalanced back to the target allocation. This is done by buying and selling holdings as needed, or by using new money added to the portfolio if applicable. The quality of portfolio management services is only as good as the periodic rebalancing it undergoes.
This part of portfolio management services considers the tax liabilities of the assets held in the account. Portfolios often include investments in both tax-deferred (or tax-free in the case of a Roth account) retirement accounts and in taxable accounts.
Why does this matter? Well, long-term capital gains taxes as well as those on qualified dividend payments are often less for many investors than taxes on ordinary income from sources including interest. Investments held for more than a year qualify for preferential long-term capital gains rates on any gains from the sales of these investments. All that being said, these factors may favor holding more equity related investments, such as bonds and other fixed income vehicles, in tax-deferred accounts. This concept of tax-efficient investing should be integrated with an investor’s overall asset allocation as a part of the portfolio management process.
Why Are Portfolio Management Services Important?
Some investors simply accumulate a number of individual holdings with little thought as to how all their various investments work together. This can lead to being over-allocated in a single area, which may expose the investor to more risk than they might realize they are assuming. A well thought out and tactically constructed portfolio is very important, and portfolio management services can accomplish this for you. Whether using the portfolio management approach yourself, or using a professional’s help, funding financial goals becomes more attainable.
A well-managed portfolio will provide investors with the diversification needed to help achieve their investment goals and is part of a good overall financial plan.
TTG Financial would love to talk with you about portfolio management services and how it might benefit you!