When it comes to investments, strategies can never be the same. For instance, there is one set of investors who never get hassled by the rise in their stock prices. Though it would have moved up substantially after their purchases, their eternal optimism keeps them glued to their portfolio. While such a passive investment strategy would have helped in the last six months, it may not at all times. After all, there is a fair value for every stock and any rise beyond a limit, not backed by fundamentals, is sure to make the stock's price retreat.
So, how does one go about making adjustments in a portfolio?
There can be numbers of ways of brining in balance in a portfolio with the easiest and now well-known option being asset allocation. In this case, the funds are allocated according to risk profile. These allocations, of course, need to be reviewed at regular intervals as the value of funds, when invested in dynamic assets like equity, can vary from time to time. It is not so much of a challenge with others like debt and even property. For instance, none will reduce holdings in property because the prices have shot up. Chances are that one feels elated even if the profits are only on the books.
Now getting back to the task of realigning the portfolio, the fundamental rule should be that the profits booked from an asset should find its way to another asset. This will make the task easier. Often, one finds that investors book their profits from a mutual fund portfolio only to invest in another scheme. In that case, it becomes a review rather than balancing.
Look at the case of equity portfolios in the current environment. For many investors who picked up their stocks during 2007-08, there is a sense of relief as some of them are inching towards their purchase prices. So, should they rush and get out of stocks. Before doing so, check out if your stock meets these conditions.
In many cases, investors made investments in certain stocks at a price which was unreasonably high. What would have compounded the problems for such stocks are the changes in the macro scenario. A classic example is some realty stocks which are still at one-fourths their peak values. If the current trend is any indication, many tier II companies are still facing the challenge of shortage of funds and a tough market environment. In such cases, it would be prudent for investors to cut down their holdings and move on to other stocks which have better fundamentals.
On the other hand, if a sector on the whole is coming out of a tough environment and is poised for a recovery, investors need not rush to sell their holdings even if the prices are closer to their purchase levels. A classic example is the stocks from sectors such as auto ancillary or oil and gas. These were slow in the last two years and the latter is coming of age only now. More importantly, both sectors are expected to deliver good shows in the coming quarters and hence investors should continue to hold rather than get elated with the recent rise.
Besides these factors, an investor has little to worry if he has invested in equity with a long-term view. Very often, a long term turns short once there is a significant change in the macro picture. But the recent upward trend in the stock markets has shown that those who didn't get flustered by the downtrend of 2008 and uptrend of 2009 are the ones who have made handsome gains.
Is it time to bring in changes in strategic thinking besides portfolio? The answer is yes.