The handbook for effective portfolio management

The idea of this article is to share a few important guidelines, which are helpful and important for building a sound long-term investments portfolio for yourself.

Let us start with – Asset Allocation and Adequate Diversification. An ideal long-term portfolio involves combination of multiple asset classes such as equity, debt, real estate and gold amongst others. Further, each asset class comprises a broad variety of sub-asset classes. For example, within equities one can have variants like domestic vs global equities, large vs mid vs small cap, growth vs value etc. A suitable asset allocation i.e. combination of these asset classes in a ratio is the cornerstone of building a robust portfolio. It is unique to every investor and accordingly weightage for each asset class should be a function of your risk appetite, time horizon, liquidity needs and financial goals. There are always periods of relative outperformance between various asset classes.

Given that asset classes are not perfectly correlated or in few instances inversely correlated, investing in different asset classes helps the investors benefit in the long term.

The second important philosophy is around – Periodic Review and Re-balancing of Portfolio, which is as critical as deciding the asset allocation strategy. Regular portfolio reviews help investors to evaluate the performance of their investments vis-à-vis benchmark as well as expected returns. Regular portfolio reviews also help investors to re-balance the portfolio if required to maintain the desired asset allocation, if the weight of one asset class has increased or decreased due to market movement. For e.g. booking profits when a particular asset class has rallied or adding to it in case of correction, always helps in maintaining the right mix.

The third tenet for building a sound portfolio is – Discipline & working with a Long-term Approach. When most of start building the portfolio with specific goals in mind, the intent is to build a healthy corpus for long-term.

Unfortunately, however, like our new year resolutions, we tend to execute it with limited discipline. Short-term priorities take over or any irrational market behaviour makes us think for near future and act accordingly. That is completely avoidable. Just like a plant needs to be nurtured well to bear fruits, your investments need time to reap sweet fruits. An approach which investors could consider is Systematic Investment Plan (SIP), which is the most time-tested and evergreen way of investing. It provides perhaps the most disciplined way of investing in equity and debt markets alike.

The next principle is around – Timing the Market. As humans, we are many a times tempted to time the peak and bottom of an asset class. History has proven time & again, that it is impossible to do so. It is therefore recommended not to chase this mirage. Over a period of 10-15 years, it’s really immaterial. Instead, it’s always helpful to focus on what an investor can control like selecting the right product etc. Also, when you try to time the market, you get to carried away by the hype in social media etc. It is important to cut the noise and focus on relevant information.

The last doctrine for sensible investing is to – Keeping Emotions Away from Investing. Investment decisions should be as much scientific and objective as much possible. However, as an investor, many a times we get swayed or influenced in decision making, which is bound to hurt the portfolio. A classic example here would be, if one has made an investment in a stock with the hypothesis that it’s a value buy and it turns out to be a value trap instead, its only prudent to cut the exposure and reallocate to better investment idea. It is not easy to book the losses for any investor but if not done, it can continue to hurt the portfolio.

In conclusion, irrespective of the investment corpus, investors should follow the basic principles of investing to be able to do justice to their investment capital & long-term goals. It is also advisable; investors should seek professional consultation while building their portfolio.