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
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.
DISADVANTAGES OF MODEL PORTFOLIOS
Not Directly Available. You generally cannot access these portfolios using your own individual brokerage account.
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.
Fees and Expenses. These fees can vary significantly depending on the provider and the services included in the model portfolio.