We all dream of an investment portfolio that promises maximum returns with minimal risk. It can primarily be achieved with portfolio optimization, a process of constructing an investment portfolio that balances risk and reward.
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This guide show the biggest benefits of optimizing your portfolio and how it can lead to financial freedom.
Benefits of Optimizing Your Portfolio
Typically, there are quite a few methods asset management companies employ. The Modern Portfolio theory is the most commonly used because it fits a lot of use cases. Needless to say, the biggest benefit of optimizing your portfolio is getting maximized returns on investments.
At the same time, you minimize the risk across the board by opting for carefully selected instruments. It's a win-win situation.
Portfolio optimization also leads to diversification. While some of the world's richest people, including Warren Buffet, don't believe in diversification, it's still one of the best ways to grow. It simply comes down to the fact that most individuals may not have the fortune to invest in a single company and sit it out for the next few decades.
Another crucial but indirect benefit you get from optimizing your portfolio is the reduction in transaction costs. As you're choosing the assets carefully in the first place, you don't have to transact constantly to maximize the returns. It cuts down on the transaction fees and other management fees you would otherwise end up paying.
Inherent Challenges of Portfolio Optimization
Nothing in the world provides a foolproof solution, not even portfolio management. For starters, gathering high-quality data for decision-making is not an easy feat. At times, it can become costly.
Then there are the limitations of all the different methods people use. The models you use to project the outcome in the future may not turn out to be accurate, rendering your efforts useless.
Another common enemy of investors is the market conditions. However, long-term investors are somewhat protected from short-term volatilities. But if you plan on shuffling your assets quite often, the market conditions can impose a challenge in the optimization process.
But if we look at the big picture, portfolio optimization is something every investor should consider. If you can't do it yourself, don't shy away from hiring a professional who can.