Reset your long-term portfolio at regular intervals to create wealth

Investing in the right fund or product by itself doesn’t assure wealth creation. Smart investors rely on process and discipline. This process is reviewed and repeated for multiple years. The choices we make daily may not matter today, but they do so in the long term.

If we give a blank slate to different investors to create their best portfolio, they would be very different. These decisions would be biased, based on everyone’s subject matter expertise and past experiences. Even great investors have vastly different portfolios, yet they manage to beat the markets independently. Another flaw with a lot of investors is that even if they have made a wrong investment, they hold on to the positions and hope that they will eventually be proven right. Similarly, they sell winning positions either ‘too early’ or ‘too late’, depending on their temperament and not on any logical, well-defined process.

Ideally, investors should replace the thought process of ‘long term investment will create wealth’, with ‘long term investment will create wealth until facts change’. If in doubt, analyse the number of funds that managed to generate minimum benchmark level returns in the last 10, 15 or 20 years, and you will be surprised/shocked. Anything that evolves like markets, technology, careers, etc., must be approached with the mindset that all great ideas can expire, and when they do so, you’re better off walking away rather than attempting to repair them.

Here are some key reasons why regular review of portfolio is important:

Dynamic rebalancing: As financial markets exhibit inherent volatility, the performance differentials among diverse asset classes necessitate a vigilant response. Periodic reviews empower investors to identify over-concentration risks resulting from the outperformance of specific assets. Through strategic divestments and reinvestments, investors recalibrate their portfolios for the intended asset allocation. This tactical realignment not only hedges against undue exposure but also fosters resilience in the face of market fluctuations. Overexposure to real estate in 2007 or NBFCs in 2018 or IT in 2022 would have caused a lot of pain to investors in the subsequent years.

Adaptation to economic catalysts: The economic landscape is constantly evolving, and various factors such as interest rates, inflation, and geopolitical events can impact the performance of different asset classes. By staying attuned to economic indicators and geopolitical developments, investors position themselves strategically, fortifying portfolios against unforeseen disruptions and harnessing opportunities arising from shifting market dynamics. Different sectors perform differently in different macro scenarios like oil prices, interest rates, global trade slowdown and therefore portfolios need to be in tune with these realities.

Strategic realignment with shifting objectives: Routine portfolio reviews provide a structured framework for investors to recalibrate their investment trajectories in tandem with changing objectives. Whether prompted by career shifts, familial considerations, or altered risk appetites, these assessments facilitate a judicious realignment of investments. A forward-looking perspective, spanning 5-10 years, facilitates anticipatory adjustments. As an example, bonds, gold, and equities have their own cycles. By adopting this view, and having the right asset allocation, an investor does not have to liquidate as asset class in a downturn and can ride the entire life cycle of various asset classes.

Performance monitoring versus benchmarks: Investors need to spend a lot of time on constant monitoring of performance metrics for the entire portfolio. This data-driven approach empowers investors to discern trends, identify underperforming assets, and replace them with others for portfolio optimisation. This should be done periodically and with a clearly defined process. Whether doing it independently or under the guidance of a financial advisor, the commitment to informed decision-making positions investors to capitalize on strategies and vehicles consistently capable of generating alpha.

Investment for creating wealth is not very exciting and can be a boring and tedious process. However, if the discipline in following the process is maintained, it can result in substantially better results over a long period.

Vineet Sachdeva is entrepreneur partner-quantitative equity investing, Alpha Alternatives

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Published: 19 Dec 2023, 07:48 PM IST

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