Investment planning: Portfolio review is not about chasing returns

March 9, 2021 2:20 AM

Allocation to equity should be as per the long-term volatility profile of equity, your investment horizon and your capacity to digest volatility

Changes need to be done only when there has been a significant change in the fundamental aspects of an investment or a significant change in your profile

By Joydeep Sen

While portfolio review can be done anytime, March being the last month of the financial year, many people look at the portfolio at this time of the year and execute their tax-saving investments. They want to know whether their portfolio is ‘working’ and the popular measurement for ‘working’ is the returns from the various investments. If the performance of an investment is relatively better, or better than expectation, it is taken as ‘working’. However, the ideal portfolio review is as follows:

Guidelines
The purpose of portfolio review is to check whether the investments are in tune with your investment objectives. Objectives include your financial goals, horizon of investments, suitability as per your risk appetite and risk-return profile of the investments, the allocation to various asset categories, etc. In case you do not have clarity on the objectives or you are not sure whether your portfolio is in tune with the objectives, it is better to consult a financial planner.

Portfolio review is not about chasing returns. In case you are selling off investments that are giving relatively lower return at that point of time but have return potential over the long term, and keeping investments doing well due to market momentum, you need to change your approach.

This is comparable to cutting the flower plants and watering the weeds. Unless your objective is to speculate and earn big bucks in a short span of time, you should look at the long-term potential of your investments.
As a pointer, the allocation to equity in your portfolio should not be as per the movement in the equity market over the last few weeks or months, but as per the long-term volatility profile of equity, your investment horizon and your capacity to digest volatility.

Sometime earlier, when gold prices were booming, people were discussing the potential level to which gold prices may move up. However, your portfolio, the outcome of your hard-earned savings, is not for guessing the price levels of asset categories. Markets are the confluence point of so many dynamic factors, it is not possible to call a market bottom or market peak. Or, for example, the rally in bitcoin.

While it is the story of the future with gaining global acceptability of the currency (if at all it may be called a currency), if you are not convinced of what it stands for and not comfortable with the volatility, you need not take it in your portfolio. This is not a comment on the future price movement of bitcoin, but to state that the risk profile of your investments should be as per your risk appetite.

Rebalancing or changes in portfolio is not necessary in every review. Changes need to be done only when there has been a significant change in the fundamental aspects of an investment (e.g., a company dwindling towards bankruptcy) or a significant change in your profile (e.g., you getting a job/better job or losing your job in the pandemic). Returns from the various components in your statement will always look relatively better or worse.

The writer is a corporate trainer (debt markets) and an author

Portfolio check
The purpose of portfolio review is to check whether the investments are in tune with your investment objectives
In case you are selling off investments that are giving relatively lower return at that point of time but have return potential over the long term, and keeping investments doing well due to market momentum, you need to change your approach
Changes need to be done only when there has been a significant change in the fundamental aspects of an investment or a significant change in your profile

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