Equity investments: Review and rebalance your portfolio, don’t just invest and forget

And this might not seem obvious when you begin your investment journey; but the realization does come eventually.

Does long-term MF investing work?

Equity is a solid asset class that generates inflation-beating returns and creates tremendous long-term wealth. It’s just that investors need to get rid of the notion that blindly buying-and-forgetting works all the time and for everyone.

Now if you broadly look at the past data, the markets in general trend upwards. But the returns you get will be determined uniquely by how much you invest at what point and what happens afterwards. Ideally, the strategy in falling markets will be different from that in a rising market. The approach would differ in a sideways moving market. And when the market reaches extremes at either end, mean reversion occurs. This is where timely intervention is absolutely necessary.

Periodic review and rebalancing can protect your profits on the one hand while on the other, can also help your portfolio generate above-average returns in the near term.

Remember, no type of market (rising, falling, sideways) is permanent. You need to be relaxed and not act in haste. But that doesn’t mean you become complacent and don’t do anything at all.

Let’s take a more specific but common example.

Suppose you are investing for a long-term goal that is 15 years away. You invest via mutual funds and decide (or are advised) to have an asset allocation of 60:40 in Equity:Debt. Now having faith in equities and in benefits of long-term investing doesn’t mean that you blindly keep investing in a 60:40 ratio over the next 15 years in the same funds you picked initially.

You cannot just invest and forget.

Every now and then, you need to check whether the chosen funds are still good enough to be a part of the portfolio. It is like checking category and benchmark returns to see whether funds are delivering as expected. If not, you need to find replacements. Similarly, after a strong rise in the market, the portfolio will witness a sudden increase in the equity component. Let’s say 75:25 in favor of equity. When that happens, you again cannot have an invest-forget philosophy. Why? Because the right thing to do then would be to rebalance the portfolio back to 60:40 and preserve some of the higher-than-expected profits.

Staying invested for the long-term works only when the product or strategy you are sticking with also continues to work. Times change, goals vary

There is another aspect to not taking the invest-and-forget approach. Your long-term goals will not remain long term forever. If you started with a 15-year goal in 2015, then in 2020, 10 years still remain. So it’s still a long-term goal. But if you started with a 15-year goal in 2010, then only 5 years remain now. So it’s a short-term goal with a five-year time horizon. You can’t have the same approach to investing in both cases. I have written about why you need to reduce equity exposure as your goal approaches. And on similar lines, de-risking retirement savings is important too.

What should you do?

Staying invested for the long term is still very important. But so is the need to review the portfolio periodically. Rebalancing and making course corrections where necessary are equally necessary. The fundamentals of good investing remain the same. But markets are dynamic and require some effort to keep the portfolio in order. It’s like gardening. You water the flowers and remove the weeds. You cannot be in a plant-and-forget mode with respect to your garden. It will become a mess otherwise.

(The writer is the founder of StableInvestor.com)