Investing can be a complex and stressful business. The idea of constant monitoring, rebalancing, and stock picking can be overwhelming (not to mention costly, if done poorly), especially for those new to investing. But what if there was a way to simplify the process and still get great results? Enter the world of passively managed portfolios. Think of it as a set and forget approach.
Morningstar research has shown that a hands-off approach to investing can lead to better results, especially when it comes to cutting costs and minimizing the impact of market timing and selection of individual titles.
Consider talking to a financial advisor if you’re trying to decide how to take a more active approach to managing your investments. Here are four steps to creating a passively managed portfolio.
Discover the guiding principle of your investment portfolio
The first step in creating a passively managed portfolio is to determine your investment philosophy and goals. This will be the guiding principle for your portfolio and will inform your asset allocation, diversification strategy and risk tolerance. Some common investment philosophies include value investing, growth investing, and income investing. There are also common methods of structuring your portfolio such as the 60/40 method.
Investors who value preservation of capital, for example, may have a lower tolerance for risk and prefer a portfolio heavily weighted in bonds and other fixed-income investments. On the other hand, growth-oriented investors may have a higher tolerance for risk and prefer a portfolio heavily weighted in stocks and other equity investments. The key is to figure out what’s most important to you, then create a portfolio that matches those priorities.
If you’re ready to be matched with local advisors who can help you achieve your financial goals, start now.
Streamline your accounts by removing duplicates
Once you have a clear investment philosophy and objective in mind, it’s time to assess and adjust your current portfolio. This may involve consolidating accounts, closing redundant accounts, and streamlining your investments. By removing duplicates and reducing complexity, you can simplify your portfolio and make it easier to manage. Additionally, reducing the number of accounts can also minimize costs while saving time.
Investors who have multiple investment accounts may find it difficult to keep track of all of their holdings and may pay multiple fees and charges. Consolidating these accounts into one or more main accounts can simplify the process and reduce costs. It’s also a smart game to rebalance your portfolio and review your investments regularly. This is when you will remove all duplicates, as holding multiple similar investments can lead to concentration risk and re-allocate your assets depending on your investment strategy.
Discover affordable and diverse investment opportunities
One of the benefits of a passively managed portfolio is the ability to access inexpensive, well-diversified building blocks, such as exchange-traded funds (ETFs) and index funds. These types of investments provide exposure to a wide range of assets and sectors, reducing concentration risk and increasing diversification.
These investment choices also tend to have lower fees than actively managed funds, which can have a significant impact on returns over time, in part due to capital gains taxes incurred by frequent buying and selling of investments.
Keep in mind that when building a passively managed portfolio, you need to consider both the asset class and the specific investment. For example, investors may consider a combination of stocks, bonds, and real estate. By focusing on low-cost, passively managed options, investors can build a well-diversified portfolio without paying high fees for active management.
Keep track of your portfolio management strategy
Finally, keep track of your portfolio management strategy, including your investment philosophy, asset allocation and the investments you hold. This documentation can help you stay on track and ensure your portfolio continues to align with your goals. In addition, it can also save you money in the event of a tax audit or other financial examination.
Investors who take a hands-off approach to portfolio management may be tempted to ignore their investments and let them be. However, you should never let your investments spiral out of control without guidance. You should always review your portfolio regularly to ensure it continues to align with your goals and make any necessary adjustments. So, by keeping track of your portfolio management strategy, you can more easily track your progress and make any necessary changes.
The essential
Creating a passively managed portfolio can be a simple and effective way to invest for the long term. By focusing on finding your portfolio’s true north, streamlining accounts, uncovering diverse and affordable investment opportunities, and keeping a record of your management strategy, you can potentially improve your investment returns. while reducing the stress and effort of active management.
Tips for investing
Many financial advisors use passive investing as their primary investment strategy. Finding the right financial advisor that meets your needs doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three vetted financial advisors who serve your area, and you can interview your advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
For those with less money to invest, robo-advisors are a great alternative to more expensive financial advisors. In fact, many robo-advisors already incorporate numerous index funds, ETFs, and mutual funds into their portfolios. As a result, passive investing is a centerpiece of the robo-advisor community.
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