Who Uses Portfolio Management?

Who Uses Portfolio Management?

Posted by on May 10, 2021

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Accredited investors and other high-net-worth individuals often use professional money managers to help them build diversified portfolios that not only meet their tolerance for risk but also can withstand cyclical downturns in the economy.

Professional investment managers build and maintain these “weatherproof” portfolios by allocating investment funds across a diverse range of assets. Investments can include a mix of traditional assets such as stocks and bonds, as well as alternative assets such as real estate, cryptocurrencies, private equity, and other non-traditional holdings.

You don’t have to have a seven-figure nest egg to use institutional-level portfolio management techniques, however. Real estate investors who employ the same investment strategies as professional investors can create portfolios that have the potential to better withstand negative economic conditions as well as better manage their investment risk.

Portfolio Management Explained

Portfolio management is the science of creating investment portfolios that meet investor expectations for returns while managing or reducing their exposure to risk. Portfolios are crafted with three primary concepts in mind:

  • Investment horizon
  • Risk tolerance
  • Asset allocation

These concepts are intertwined -- each affects the other two. The end game is twofold: the portfolio potentially achieves your financial goals (rate of return) and manages the risk to your investment capital.

Although wealthy investors often use this investment strategy, retail investors also can capitalize on these concepts when building their own portfolios. You may have to spend some time analyzing your current asset allocation and rebalance your investments by completing 1031 exchanges to better manage risk, though. There also are some potential tradeoffs as well -- rebalancing may lead to lower returns with some investments in favor of reduced or more manageable risk by spreading your real property interests across a broader spectrum of assets.

Applying the Principles of Portfolio Management to Real Estate Investment Properties

Applying the principles of portfolio management to alternative investments such as real estate is different than applying them to traditional financial assets such as stocks. For the latter, money managers typically diversify portfolios and manage risk by allocating assets across large- and small-cap stocks, as well as bonds and cash, according to an investor’s tolerance for risk and expectation of returns.

Real estate portfolio management, however, requires investors to have expert-level insight into the strengths and weaknesses of a range of property types, as well as their performance across a variety of geographical regions. Investors who can better grasp market fundamentals by property type and region can potentially identify investment opportunities that could lead to a diversified multi-asset portfolio. 

Retail investors working on their own might consider forming relationships with commercial real estate brokers in different cities -- these property-level specialists have invaluable expert insight you’ll likely need if you are seeking investment opportunities in unfamiliar markets. If that sounds like a lot of legwork, real estate investors also can consider “pre-packaged” offerings, such as fractional interests in Delaware Statutory Trusts (DSTs). 

DST investment properties are fully vetted and can be tailored to meet your investment goals, regardless of your net worth. If your risk currently is concentrated in one asset class or location, you can employ the portfolio management strategies outlined above to create better balance in your portfolio, as well as optimize your real estate holdings for targeted risk-adjusted returns.

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Consult with your tax advisor regarding your individual circumstances.

 


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