Published Article Details

Annual strategic portfolio review must to grow wealth

Posted by: Uma Shashikant on Jan 09, 2017, 06.30 AM IST

By Uma Shashikant, Chairperson, Centre for Investment Education and Learning

Portfolio review is an important, if seriously underrated task. It is just boring number work for many of us. Look at it instead as an annual strategic review. If you review what you have and are willing to set standards and evaluate against them, you will do just fine. Calculations, gains, taxes and costs can wait for your annual accounting exercise while filing your tax returns. Your wealth needs an annual quality check.

First, consider the equity shares you hold. Classify them as buy, sell or hold. During the year, buy more of what you love, sell what is not working and classify the ones that do not evoke either strong emotion as hold. But make sure you write down-yes, write down-at least three reasons why you have classified them thus. This represents your brief investment thesis. When you come back next year, you will review each one of your equity holdings against these points.

For example, assume that you wrote down that XYZ Bank is a hold in your portfolio since you think the banking sector will do better than average; XYZ Bank will enjoy above average loan growth; and that it will be among the top five profitable Indian banks. These represent key reasons you want to be an equity shareholder in the bank. Do not write that you like its name, fame, or its management-there is no reason why you should buy a stock with poor management or credentials. You need parameters the stock has to live up to. Then you set standards against which you can review it.

Next year, ask whether it did what you expected it to do. If not, you will seek more information. Your analysis of the stock, sector, market, indices, valuation, financial strength, and such will focus around the key parameters you care about. You will enjoy this focussed analysis against generic bluesky ideas floating about. You will bring tremendous discipline to your equity holdings if you stay focussed on your stocks and why you hold them. And you have the ruthlessness to throw out what did not work. Returns and risk will take care of themselves, if your process is good.

Second, list the equity mutual funds you hold. The same three-point investment thesis works here, except that it is the same for all the funds. Is the fund doing better than the benchmark? Is it an above-average performer in its category? How good was the downside protection it offered? If you choose funds where you are not sure about the benchmark, or you don't know what category it is, you may have needlessly complicated your life.

A fund manager is paid to do better than the benchmark index, and ideally the difference in performance should be higher than the 2% fee you are paying. You have a choice of funds and you need not stay invested with a below average performer. Do not care much for the name of the manager or the fund, since you have done the due diligence before buying. Your loyalty is towards performance and you should not be distracted by explanations and excuses. If you are the kind who cannot be so ruthless, or worried you will select wrongly if you make different choices each year, extend the same performance rules to a 3-year holding period. What the fund did since you bought it is what you should care about, not the published results in the press.

Third, list the debt funds you hold. The return should be better than that of a bank deposit. A debt fund invests on the asset side of a bank balance sheet, without the burden of capital adequacy. It should provide a superior return else there is no case for choosing it. Knock off funds that do not match up.

Fourth, list the bonds you hold. Check if the bond's credit rating remains good and that it is not under watch. If you hold bonds that are tough to sell, or have slipped down, or bonds you worry you don't know enough about, sell them off. There is enough investment opportunities in the market to be wedded to some obscure decisions you may have made.

Fifth, check the amounts you hold in bank deposits, post office, PPF, NPS, PF and gratuity. The sum total of what you hold here, plus your bonds and deposits represent your fixed income holding. Minus any loans that you have outstanding, including home loans. The balance is the amount you have as readily accessible, unexposed to market risk, and available for any immediate use you have this year. If your child is going abroad to study, you should be able to cover the fees from this chunk of income assets.

Income assets are your buffer. Review them with that objective in mind. They represent money you will hold safely if you lost the job; if the equity markets crashed; if real estate prices drop too much; if a family member unfortunately passes away; or if your business venture does not turn profitable as expected. Income assets are also your tactical tools. If equity, real estate or gold prices crash and you want to make the most of it, you can use the income assets to make an investment. Make sure you have enough for these needs as best estimated by you when you review. You have much more, you are being conservative; you have too little, you have been too aggressive given your needs, or worse, you haven't saved enough!

Equity shares and funds are your wealth creators. Review them with the objective of ensuring they are of great quality and continue to run for you. You can never select right when it comes to buying them. There is a whole world of choice and you do not have a crystal glass. But review is simpler. You only have to examine what is on hand. Make sure they are worth your hard-earned savings.

All the other assets you hold should have a clear purpose. Insurance should cover your family if the biggest risk manifests, and your wealth falls short. If you have property or gold, you should know what you intend doing with them. If you trade and speculate on the side, those are not assets but mere entertainment. Once a year subject your assets to a stringent quality check and relevance to your life. Do not waste your time wondering about what is in store for 2017. No one knows. This article appeared in Economic Times dated Jan 09, 2017, 06.30 AM IST

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