Building a good diversified portfolio is a journey, not a one-time action. It is not a straight-line process either and, many a times, involves taking a step or two back as well, while the overall direction remains one of moving forward.
As planners, this is something we do periodically in order to exit assets, which we feel are not well-poised for the future, and move to investments that are more aligned towards goals and expectations. While one would think that conversations for making such changes in portfolios would be easy, many times, they are not.
A friend had reached out to us for a review of her current portfolio a few months ago. She was diligent in setting aside a tidy sum towards her retirement, which was 10 years away. When she approached us, she had a sizeable portfolio and had invested some bit in a few stocks as well. We recommended that she exit some of the current holdings, since they were not aligned to her needs. She made efforts to understand our reasoning for the same. However, she did not revert to update us if she had taken any action.
She reached out again last month, and told us that she had sold many of her investments that were profitable. She wanted to “book profits.” When we asked her what happened to the holdings that we had asked her to exit, she promised to do it as soon as they turned positive. She has been holding on to these investments, which were not aligned to her goals, for years, waiting for them to turn positive and she had sold a few as soon as they turned positive and intended to do the same with the remaining portion.
What came to mind in this situation is a quote of Peter Lynch: “Selling your winners and holding your losers is like cutting the flowers and watering the weeds.” Here are a few pointers for you to ponder, so that your portfolio review exercise ends up cutting your weeds and nurturing your flowers.
Do not expect all your holdings to be outperformers
When you construct a portfolio, you are bound to have outperformers, middling investments and some laggards. It is very difficult to choose only the winners. You need to be prepared for this before you invest. You must have a plan to prune the weeds along the way. Hanging on to laggards endlessly in the hope of some miracle that will turn things around is definitely not conducive to making a future-ready portfolio.
Look at portfolio performance, not individual holding
No matter how good you are or your advisor is, not all your investments will be outperformers. There are going to be a few investments which are doing ok and a few which are not living up to your expectations and the reasons for buying them in the first place. It is important therefore to look at your investments as a combined portfolio and review the performance accordingly, in terms of how you are doing vis-à-vis your goals.
A simple way to review your holdings would be to check if you have the money invested in these funds as investible surplus, are you likely to invest it in the same scheme. If the answer is yes, you can hold on to it. If it is a no, it’s time to do a deep-dive and understand what has changed between the time you invested and now. If the performance is related to the overall markets, it’s best to leave it untouched. But if the reasons are specific to the investment, it is time to dispassionately sell and look for greener pastures.
Volatility not a sign for you to abandon a plan
When you invest in equity, volatility is a given; you need embrace it. Pruning your poor investments should not be confused with timing the market. We are only referring to re-jigging your portfolio by getting rid of investments which no longer align with your overall plan and look like a mistake on hindsight.
Booking profits and re-entering difficult
While this seems like a smart way to generate good returns, it is very hard to implement it practically. How will you know when you should book profits? We truly believe it is easier to assign goals to your investments and look at the larger picture.
Building a good portfolio, perfectly aligned towards your needs, takes time and patience. Sometimes there could be an underlying change in the investment environment, requiring you to take action to see that your holdings still remain relevant and ensure that you meet your goals. It is important carefully prune your portfolio to ensure that you are left with a bunch of roses and not a bush of thorns!(The writer is a Certified Financial Planner and Founder of Finwise Personal Finance Solutions)