Investment Planning: You portfolio will do well if you weed out underperformers; is it time to review and rebalance it? A portfolio does well if it holds funds that are doing well over a long period of time, but there is danger of over-simplification in this statement
We began talking about personal finance as we walked along the river. This elderly gentleman was visiting us for a few days. He had a bank relationship manager who helped him with his investments. She had moved to a new bank and wanted him to shift as well. He was not a regular reader of this column and had chanced upon a few articles forwarded through his network. He was enamoured by the idea of keeping things simple.He earns an adequate pension, which more than meets the couple’s needs. Both children are well educated, live abroad and do not expect any support or bequest. On the contrary, they are always willing to provide for the elderly parents’ comforts. He has built some investments in the 22 years after retirement. In his mind, keeping it simple meant liquidating everything and keeping the money in bank fixed deposits. He told me he did not care much about the interest being low.
That might be too drastic, I argued. Things could be simple even without sacrificing returns. By the end of our walk, he was willing to show me his latest NSDL statement and examine ways to keep it simple. In the past 30 years of looking at individual portfolios, I am often dismayed at the unmistakable similarity in patterns and design. There is invariably a stock portfolio and a three-in-one account that links the bank demat and trading accounts. They always say that they do not know much about stocks, but have IPOs. They tell me they don’t trade actively, but there are transactions and trades they don’t know much about. Alarmingly, there are stocks they do not know much about.
Every time someone tells me that they are stock ‘investors’, I am keen to hear about the homework, or follow-up. However, most retail investor trysts with direct stock investing are alarmingly trivial. Bought on a whim or a tip, held irrespective of performance, and sold sparingly. Some have a long list and know a few good stories. The bad ones they don’t tell others. When I ask how the portfolio is doing, they tell me that they just know about the reds and greens at the top of the statement, briefly celebrating the green months, while being reticent about the reds. This gentleman was no exception. I pointed to his holdings: proportions held in each stock and their annual performance. I showed him how to look for stock return performance over time. He saw that he held a disproportionate amount in an unknown stock that was not doing well.
Learning how his holdings contributed to the performance of his portfolio perked him up. He was able to easily work the math in his head; he had fewer winners and more losers. I told him that he would be fine just holding the index if he found stock selection complex. He heard me explain about ETFs and asked me relevant questions. We were making progress. We scrolled down to his mutual fund holdings. There were too many of them with too little in each, including some ETFs he did not know he already had. Most were bought on the recommendation of the relationship manager; something new each time they met. There was one SIP for a measly Rs 500 a month. The portfolio was a mixed bag of good and bad, and I pointed to the last column to help him see how they were doing. We still have investors who don’t know where to look for fund performance. They are lost in too many numbers to see what is relevant.
Portfolio review and rebalance is something we routinely talk about, but for most investors it is not an easy concept to grasp and implement. A portfolio does well if it holds funds that are doing well over a long period of time. There is danger of over-simplification in this statement. What is doing well? What does ‘beating the benchmark’ mean? What is a long period of time? What should be a concern? What can be tolerated? The 82-year-old was intimidated by all this. He wanted to liquidate and run.
Then I took the other route. Your portfolio will do well if you weed out what is not working, I told him. Having learnt the concepts and where to look for returns, he was able to see what was not doing well. We were able to establish that some funds had been lagging long enough to not be in the portfolio. We made a list. Then he asked me if this money was going into bank deposits. We launched into a discussion about the running rate of the portfolio. He was finally convinced that allowing his money to run at the equity market rate was good for him, his children and grandchildren. You have an adequate pension for income, I had to remind him. Income and growth seem like basic concepts, but many investors do not know enough or have adequate conviction to implement a blend of both as their investment strategy.
He began to explain. He knew that letting money idle was not good. His friendly bank manager called him when he had a sizeable arrears payment in his bank account. She showed that he could earn a better return with a safe product launched by the very bank that had his pension account. I almost knew what was coming. It had to be a PMS product or insurance, I feared. It was a corporate bond fund. Our friend had invested a sizeable amount in his and his wife’s names in this product.
I let out a sigh. How could I explain to him that the fund would fluctuate in value in inverse proportion to the movement in interest rates and that it also carried credit risk? Total return in bond funds was a concept that established my credentials as a trainer 25 years ago when bond funds were new. I could not begin that lesson now. I was unwilling to subject him to the concepts that would most likely make him worried and, perhaps, scared. I focused on performance, without taking any interest rate views for the future, and told him such a large sum in a single product might work against him. I was content that I was able to teach him sensible diversification, at least.
We then discussed the operational details of consolidation in a few funds, ensuring nominations, and keeping it to a handful of products after liquidating stocks, except for two blue-chips. As is always the case with such investors, he has begun implementing in earnest. However, we have thousands of investors who hold meaningless portfolios and just don’t know how to review these. This thought both daunts and haunts me.
The Author IS CHAIRPERSON, CENTRE FOR INVESTMENT EDUCATION AND LEARNING
Connect with Experts - Wealth creation made easy(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
This story originally appeared on: India Times - Author:Faqs of Insurances
