Model Portfolio
A model portfolio takes a diversified approach to investing by targeting a balance of risk and return based on a transparent strategy. Model portfolios are a diversified group of assets designed to achieve an expected return with the corresponding risk. Ideally, each portfolio has a combination of managed investments based on extensive research. These portfolios blend asset classes, investment managers and investment strategies to achieve diversification. They can include a large mix of different assets like stocks, bonds, and other investments spread across different industries. Today, model portfolios allow investors to use simple and effective investment methods that require minimal management effort.
ADVANTAGES OF MODEL PORTFOLIOS
Ease of Use. You don’t need to make any decisions to design the portfolio or update the investments over time. You just pick your objective, and the model portfolio investment team handles the work.
Diversification. Diversification is an investment strategy where you spread your money across many different types of assets and industries to lower the risk of losses. With model portfolios, it’s easier to get more diversification with less initial investment.
Lower Fees. Model portfolios typically have lower investment fees compared to hedge funds and actively managed mutual funds that try to out-earn the stock market, but higher fees than simpler investment options like index funds.
High-Quality Management. Using model portfolios, you can invest in funds managed by some of the top investment companies in the country and the world.
DISADVANTAGES OF MODEL PORTFOLIOS
Less Customization. Some of the major disadvantages of model portfolios is their lack of flexibility and customization versus picking your own investments.
Not Fee-Free. Even though model portfolio fees can be lower than other investment funds, they still do charge a management fee. This is something you wouldn’t pay if you built your own portfolio.
Fewer Updates on Performance. While mutual funds and ETFs give updates on their value every day, model portfolios typically do not.
Not Directly Available. You generally cannot access these portfolios using your own individual brokerage account.
FACTORS TO CONSIDER BEFORE INVESTING IN MODEL PORTFOLIOS
Risk Profile. One of the essential factors to consider is an individual’s risk profile. This refers to an investor’s willingness and ability to take on risk when making investment decisions.
Investment Objectives. This refers to an investor’s specific financial goals, such as building wealth, generating income, or preserving capital. Model portfolios may be designed with a particular objective in mind, and investors need to align their objectives with those of the model portfolio.
Time Horizon. This refers to the expected time an investor plans to hold their investments before needing them for financial goals such as retirement or purchasing a home.
Fees and Expenses. These fees can vary significantly depending on the provider and the services included in the model portfolio.
Provider Reputation. Investors can seek recommendations from financial advisors or do their due diligence by reading reviews and checking ratings from reputable sources.