What is Investment Management?
Investment management is a service that is offered by investment advisors, financial planners, and financial advisors. This particular service involves these six important aspects of the formation of an investment strategy:
- Allocating assets
- Choosing appropriate investment vehicles
- Monitoring positions and markets
- Managing the portfolio
- Paying attention to share class costs
1. The first thing that investment management will include is determining your asset allocation. When looking at the asset allocation for your portfolio, first you'll want to determine where you are in your life. How many assets do you have? What is your net worth? What are your expenses? You'll also want to discuss your emotional tolerance. This is a very important thing to factor in when determining how you're going to allocate your investments, because your degree of risk aversion will help decide how much you will have in stocks and bonds, or any of the other asset classes that are available. Once asset allocation is determined, then we'll want to move to the next step.
2. Step two is going to be the identification of appropriate investment vehicles. There are so many types of investment vehicles out there. The most popular securities are mutual funds, ETFs, common stock, and individual bonds. You and your advisor will want to evaluate mutual funds and ETFs based largely on their expenses, internal expenses, and their turnover, in addition to their tax/cost ratio. By looking at these three elements of the mutual funds and ETFs, you'll have an opportunity to select one that will have the lowest overall cost to you, while giving you the exposure in the asset class that you are looking for.
3. Third, investment management involves monitoring current positions and capital markets. Now, when many people hear this, they think of timing things, and that's not what I'm talking about here. I'm largely not talking about moving in and out of markets. That can be a factor, but for the most part, we're talking about how the fund or the ETF is being managed, and if you own individual stocks or bonds, what is going on with that particular company. Understanding that will help you be able to make decisions about whether or not you want to buy more or sell your current positions. Many things can happen to the companies that you own, of course, as well as even the mutual fund and ETF companies. You have to monitor these and make sure that both the mutual fund and even the individual companies are being managed in a way that you feel is still advantageous to you.
4. Next, an important aspect of investment management is task-sensitive portfolio management. When you are selecting investments, it's extremely important to make sure that they're put into tax-advantaged vehicles, whether it's mutual funds or ETFs or annuities. Annuities have a bad reputation, but that's not the focus of this article. I'll just say that there are some annuities that have no commission to get in, no commission to get out, no surrender period, no penalties or charges to ever move the money, and are very, very low cost. These types of annuities are available to firms like mine, which are fee-only.
In taxable accounts, you'll often want to purchase municipal bonds, or if you're close to or over the age of 59 and a half, you can use annuities to have your money grow tax-deferred. The money will only be taxed in annuities—the growth will only be taxed when you pull the money out. By using municipal bonds instead of treasuries or corporate bonds inside of your taxable accounts, you will not be taxed at the federal level. This can be very advantageous for our clients, depending on their income tax bracket.
Probably the most important thing to do in a tax-sensitive portfolio and inside a taxable account that is not in an annuity will be selecting mutual funds or ETFs that have the lowest tax cost ratio you can get, which means they'll also likely have a low turnover. We see this type of performance and low tax cost ratios being executed with basic indexed ETFs and mutual funds.
5. Another important aspect of investment management is implementing rebalancing strategies. Each year you should look at your asset classes, whether they be individual stocks, individual bonds, or the other ones we've talked about, which were mutual funds and ETFs. They will sometimes grow more or less than the other securities inside your portfolio. And it will be important to rebalance those. We recommend rebalancing once a year. But you don't want to just rebalance those based on your previous asset allocation strategy and your previous level of risk. You want to, once again, evaluate the level of risk that you need to meet your goals, along with your emotional tolerance. What types of drops can you stomach and still sleep at night? This will help you to determine whether you really just want to rebalance your portfolio to match what you had in the past, or if you'd rather rebalance to a new asset allocation strategy that is more indicative of your current financial situation.
6. Finally, in investment management services, you want to pay close attention to the cost of your share classes. This is one of the things that you have control over: if you're going to purchase mutual funds and ETFs, you want to purchase ones with very low internal expense ratios. They are certainly available to you.
This concludes part two of our series answering the question of what is investment management.
These are typically six of the most important services that we see as being important to investment management. We believe that these six things encompass the actions that should be taken with investment management, whether you're doing it yourself or working with a professional. This concludes the series “What is Investment Management?”
Investment management is a core service of most financial planners or wealth advisors. You can set up a short 20 minute call with me to discuss your investment strategy and get a free 2nd opinion on your investment portfolio: https://calendly.com/thomascloud/retirement-ready-success-call. There is no cost of obligation.
Also I encourage you to watch my free retirement video: https://go.thirdactretirement.com/strategy