The Sensex touching a 32-month high led to euphoria all around. Investors who held on and those who bought at lower levels during the depth of the correction are now sitting on huge gains. Though these instances are few, the obvious question is ?is a buy-and-hold strategy, the stated approach? There is no particular solution suitable across the spectrum and one should look at the prevailing economic environment. At all times, especially during volatility, one should look more closely at a strategy to be implemented on asset allocation and portfolio re-balancing.
Asset allocation: Asset allocation basically means dividing an investment portfolio among different asset classes like stocks, debt funds, bonds, commodities, Ulips, government securities and real estate. Determining the mix is based on one?s risk profile and time horizon.
No pain, no gain: The relationship between risks and rewards works in this manner. If one has a long-term goal with a time horizon, investing in an asset class like equity, generally gives more returns. It is also important that one understand the degree of risk in the financial products before investing in them.
Diversification across asset classes reduces risks as returns among asset classes, in most cases, do not move up and down at the same time. During the downturn, if one had gold in the portfolio, the return generated by this asset outweighed the returns generated by direct equity or debt funds. A diversified portfolio should be diversified at two levels: between asset categories and within asset categories.
Portfolio rebalancing: Bringing the portfolio back to the original asset allocation mix is what portfolio rebalancing does. This is true in the current situation, in which the valuation of equity stocks in the portfolio is probably higher than the original asset mix. By rebalancing, one ensures that the portfolio does not overemphasise an asset category. One should also ensure the review of investments within each asset allocation category.
One can rebalance one?s portfolio by selling investments from over-weighted asset categories and using the proceeds to effect fresh investments for under-weighted asset categories. One can also make fresh investments for under-weighted asset categories and if one is making a SIP or a constant contribution, say in an equity fund and if the equity asset class is overweight, one could re-direct the SIP to a debt fund.
The effect of taxation and/or exit loads at the time of rebalancing should also be looked at every six months or every year. If one invests in mutual funds, he should check the fund manager?s performance and changes within the fund and in the fund strategy.
Long-term investing strategy should be driven by one?s goals and the asset allocation, which is determined by the risk profile and time horizon. Monitoring the progress at regular intervals will go a long way in making one a successful long-term investor.
?* The writer is founder of WealthWays Private Wealth Management