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Review your portfolio Time to Time

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As the market digests the impact of the Budget, it is time to take stock of your finances as well. Find out how and why you should rebalance your portfolio at this juncture.



Spring brings with it new life, new hopes... and new investment rules in the Budget, which forces investors to rejig their finances. However, the Budget alone should not be the reason to change your investments. You should review your portfolio on a regular basis since it not only ensures stable returns, but also enables achievement of goals more easily.


Are you a passive investor, who believes in investing and forgetting? Or do you monitor your investment portfolio closely, checking the performance on a daily, even hourly, basis? Neither approach is an effective way to grow wealth. If you fall into a slumber after investing and don't check the performance of your investments periodically, your portfolio may get out of shape. On the other hand, if you can't sleep without checking the daily gains and losses in your portfolio, you might make rash decisions that would harm its long-term prospects.


For best results, take the middle path to managing your portfolio. Don't make a habit of running through the numbers every day, but do not ignore the performance completely. You must review your portfolio at least once a year. "Just like your car, your portfolio needs a check-up once in a while.

Check the asset allocation


The most important thing to assess during the annual review is the asset mix of your portfolio. This is simply the proportion of your corpus invested in different asset classes to diversify and contain risk. When you started investing, you must have decided how much to allocate to equity, debt and other classes like gold and real estate. Over time, however, this allocation would have changed because investment classes give different returns.
For instance, if you had decided to allocate 40% to equity and 60% to debt at the beginning of 2012, by the end of the year, the equity portion would have grown to about 44% of the portfolio. A change to this extent is tolerable and can even be ignored. However, in a year like 2009, when the stock market surged 71%, the equity component would have grown to 51% of the portfolio.

The change in allocation also alters the risk profile of the portfolio. You need to bring it back to the comfort zone by rebalancing it at this juncture. However, this is easier said than done. Rebalancing sounds practical, but is difficult to practise because it requires you to offload the winning investments and buy out-of-favour assets. Your stock investments may be doing well, but you should still sell them.

There are some practical gains that accrue to the disciplined investor who rebalances his portfolio. We tested how a portfolio diversified across stocks, debt investments and gold would have done in the past five years. An investor who put 50% in stocks, 30% in debt and 20% in gold, in 2008, and did not touch the portfolio after this, would have earned an overall compounded return of 7.5%. On the other hand, a person who invested in the same ratio, but rebalanced the investment every year, would have earned a return of 8.5% (see chart).

Not tracking your progress or reviewing your portfolio is like walking with your eyes shut. Even the best asset allocation strategy might fail if it is not reviewed. One cannot accurately predict how different asset classes will perform over time. Having the right asset allocation strategy can limit wide fluctuations in the portfolio.

Reorienting the allocation is also required as you approach your financial goals. If your goal is more than five years away, you would do well to tilt toward equity, which is a volatile asset class but offers the best rewards in the long run. As the goal comes closer, allocate a higher percentage to debt and leave less to the volatility of the stock market.

When and how often must you do it?

Most experts recommend you review the portfolio every 3-6 months. A review does not mean you have to follow it up with rebalancing. It is done only to check how individual investments are faring. For instance, one should check how each mutual fund investment has performed relative to the benchmark or peers in its category. Certain investments should be junked if they have been consistently underperforming over time.

Be mindful of costs

Rebalancing has its costs as well. When you finetune your portfolio, consider the tax implications of selling assets. Since you are booking profits from your winning investments, the resulting capital gains will attract tax liability, depending on the tenure for which the investment was held. Sell those investments that have completed a year to avoid a higher tax liability, both in case of equity and debt investments. If you sell funds within 1-2 years of purchase, you may also have to shell out exit loads.

Every time you buy and sell any stocks or funds, you incur certain transaction costs as well. These will eat into the gains that you have made on your investments. So, avoid making frequent changes in your portfolio. In some cases, it might be more beneficial to simply stop investing in an overweight asset class while continuing with other investments. The balance will eventually be restored.

The advantage of rebalancing can be nullified by excessive costs. "Acute churning can actually wipe out a chunk of the returns that you have generated," cautions Chauhan. However, if you rebalance sparingly (once every year, if required), the benefits of rebalancing will far outweigh the costs incurred in doing so.

CRASH OF 2008
Stock prices fell 52%, wreaking havoc on portfolios. Rebalancing helped the disciplined investor buy more equity at rock bottom prices.


REVIVAL IN 2010
When prices bounced back in 2009 and 2010, the rebalanced portfolio outperformed the static one, but it was time to sell equity once again. Gold was also on the selling list.


CORRECTION OF 2011
The stocks slid back in 2011 but the rebalanced portfolio did not lose too much. The static portfolio managed to contain losses because of a surge in gold.


FUTURE TENSE
The static portfolio has not only lagged the rebalanced one but is overweight in equity and gold. Both asset classes are facing uncertainty right now.

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