Keep Your Investment Process On Track

Chief Executive Officer, Wiseinvest Advisors 

A well-planned investment process goes a long way in allowing investors to achieve their goals over varied time horizons. However, keeping investment process on track can be a tough task as one has to face numerous challenges, starting from the stage of deciding asset allocation and continue through the entire time horizon. While the asset allocation determines the potential returns and the attendant risks, the decisions on rebalancing and monitoring the portfolio are crucial from the point of view of keeping the portfolio on track. The level of investment success depends upon how an investor handles these challenges. Here are a few tips on how you can tackle these challenges:

KEEPS AN EYE ON RISK AND REWARD 

One of the most crucial factors that determine the level of investment success you can achieve is effective balancing of risk and reward. Therefore, the focus should be identifying your risk tolerance level and deciding a suitable asset allocation. The right way to decide asset allocation is by aligning it with your time horizon. For example, equity funds require you to have risk appetite to withstand market volatility as well as long-term time horizon. Therefore, equity should be the mainstay of your portfolio while investing for long-term goals like building a corpus for children’s education and retirement planning. However, as you get closer to the completion of time horizon, rebalance your portfolio gradually to protect gains as well as make it suitable for the changed role, i.e., from accumulation to disbursal. Keep your portfolio compact Monitoring the progress of the portfolio is as important as making the right selection. Therefore, you must build a compact portfolio without compromising the level of diversification. Mutual funds are an effective way of achieving the right level of diversification by investing in carefully selected funds. Remember, over-diversification is generally the result of following a haphazard approach. 

KEEP FOCUS ON YOUR GOALS 

While the volatility is a natural phenomenon in the marketplace, it is important not to allow it to influence your long-term investment strategy. For example, a falling market may tempt you to either invest aggressively or abandon an asset class like equity completely. Remember, both these extreme reactions can jeopardize your financial future.

While a disciplined approach is the perfect way to benefit from equity or equity-related investments, a haphazard approach to realign the portfolio amidst short-term volatility is most likely to backfire. Moreover, when you make an attempt to speed up the process of recovering losses in the portfolio by investing short-term surplus money, the result may not be in line with your expectations. However, over the long-term, the short-term fluctuations tend to smooth out. 

It is also important to analyze the performance of the funds properly to avoid making any abrupt decision. The right way is to analyze their performances vis-a-vis the benchmarks and the peer group. Remember, even the most consistent fund managers are likely to deliver negative returns when the markets correct. Therefore, short-term negative returns, in line with the market, from a fund that has been doing well for years, does not warrant any reaction. Similarly, even a poorly performing fund could give decent returns when the markets are doing well. Also, the impressive returns may be due to the aggressive investment strategy of the fund manager that may expose you to higher risk than your accepted level. 

Similarly, it is quite common to see investors getting tempted to make changes in their debt funds depending on interest rate movement. While there is nothing wrong in realigning the portfolio, haphazard changes can be counter-productive. It also helps if you select funds well at the start of your investment process. 

As is evident, rebalancing the portfolio can be a great tool to keep your investment process on track. No doubt, it can be tough at times to redeem in a rising market or to invest in a falling market. However, rebalancing imposes discipline and ensures that your portfolio mix does not take you beyond your defined risk profile.