Developing a Portfolio: Balancing Risk and Reward

The role of brokers and registered investment advisors is invaluable; they educate investors; they manage the fine, tedious details of investing; and they give their best advice and guidance to clients who come from a variety of backgrounds and financial familiarities. Investing is much more of a science than an art. It is a learned skill. That means investment professionals who purport to offer information or techniques at odds with conventional wisdom may not be offering the most suitable advice to their clients.

Every client has a unique mix of tolerance for risk and desire for speedy returns, and each broker has a legal responsibility to take those needs into consideration when recommending suitable investment products. Investors want to believe that their chosen professional offers a better perspective and more productive advice than another, but do the specifics of a portfolio recommendation matter?

Within common sense parameters, many portfolios yield similar results

A recent article by Michael Batnick, Director of Research at Ritholtz Wealth Management, compares two different portfolio returns over a 10-year period. Both portfolios have the same distribution of stocks, bonds, and asset classes. The difference is that one portfolio contains each of the best performing exchange-traded funds of the past ten years, while the other was chosen mostly at random. In the short term, the differences might have been more obvious, but over the duration of the experiment, the “ideal” portfolio returned 5.95%, while the “random” one returned 5.19%. That difference is startling; while brokers may tout the benefits of one particular holding of an asset class over another, this article suggests that such a benefit is minimal.

Granted, the article in no way advocates for the wholesale abandonment of investment professionals and brokers. Instead, what Batnick emphasizes is that, with good guidelines, such as the correct allocation and distribution of asset classes in a portfolio, and with a long-range perspective, most clients can expect to see a reasonable return. If an investor can tolerate a higher risk portfolio, or wants more significant results in a shorter duration, then a broker can make recommendations based on those needs. Communicating, understanding, and considering each client’s needs is what separates effective and reliable brokers from unscrupulous or criminal ones.

These types of extravagant promises are rarely appropriate in investing, where patience and care lead to more reliable results. The Frankowski Firm has experience assisting investors who are new to the complex world of financial law. If you or someone you know has been misled, or lost money as a result of the unethical practices of a broker or investing firm, please contact The Frankowski Firm at 888-741-7503 to discuss your potential legal remedies with an experienced investment negligence lawyer, or complete the contact form.