Dalal Street Investment Journal

Here’s How You Need To Manage Your Equity Portfolio

It can be quite a challenge for investors to handle different stock market situations. While the right way to tackle different market moods is to keep focus on investment goals and time horizon, investors’ reactions are usually quite different. In a rising market, they feel tempted to not only allow the portfolio to ride on but also develop a bias towards equity to benefit from the momentum. Similarly, in a falling market, as the fear takes over, they feel compelled to exit in a hurry as well as stop making further investments. Consequently, investors either end up getting exposed to much higher risk or getting much lower returns than what they should on their long-term investments.

It is a proven fact that equity investments require long-term commitment. Hence, any abrupt changes in the portfolio can derail one’s investment process. Although some level of exuberance and fear in the minds of investors is normal as the stock market usually has a mystique surrounding it, the right way to benefit from its true potential is to be sure about the level of allocation to equity and by following a disciplined approach to investing. It is important for investors to know that investment itself is a process and not an occasional activity.

Therefore, one must decide asset allocation for each of the goals before starting investment process and keep it closer to that through the time horizon. For example, a young investor may decide to invest a significant part of the amount earmarked for creating his retirement corpus in equities. If he has another 25-30 years to retire and the money is invested in an option like equity funds through SIP, there is no reason for him to worry about the market volatility now as he has time on his side. In fact, for this reason, there may not be any need for him to make changes in the allocation.

Of course, if someone decides to keep 50:50 allocations to debt and equity, the strategy has to be a little different. In case the portfolio drift s by say 10 per cent or more, it would be prudent to rebalance it. Portfolio rebalancing is a process whereby one brings different asset classes back into a proper relationship following a significant move in one or more. However, the rebalancing should be done only for the accumulated corpus and the fresh investments should continue uninterruptedly. Remember, portfolio re-balancing, either up or down is a necessary ingredient for the long term success.

Let us understand this through an example. Assuming your Advisor has determined that given your risk tolerance, time horizon and financial goals, your allocation to equity and debt should be 55:45, Rs 55000 will be invested in equity funds and the remaining Rs 45000 in debt and debt oriented funds. A good run in the stock market, like the one that we have been witnessing over the last one year or so could increase the valuation of equity portfolio to Rs 1 lac (67 per cent) and the debt portfolio to Rs 50000 (33 per cent).

Of course, anyone would be happy to look at this kind of growth in the portfolio. However, the problem is that if you allow your portfolio to ride on, it moves you away from your original asset allocation and risk profile. This can prove be quite risky in situations where the residual time horizon for achieving a particular goal may not be long enough. Considering that the purpose of establishing an allocation is to achieve the best possible returns by adhering to an acceptable level of risk, ignoring a significant shift would violate that premise and expose you to much higher risk than warranted by your risk taking capacity and investment objective. As is evident, one if follows a disciplined approach, investment decisions are taken as a part of well thought out strategy rather than to either take advantage of upside in the market or to protect investments from the market downturns. Investors will do well to remember that equity as an asset class allows them to own some of the best businesses and hence they need to think like an entrepreneur while investing in it. In other words, patience and perseverance can ensure success for them on a consistent basis.