The end of the year is when most people take some time off and review their portfolio. People look forward to assessing the progress towards their goals before the start of a new year and try to understand what can be done in order to realise them sooner. Some also consider rejigging their portfolio.
However, rejigging of a portfolio is advisable only if your investments are not performing as expected or your goals and requirements have changed. They say we shouldn’t change something which is working well. The same holds good for investments. If your investments are providing returns as expected, then there is no reason why you should rejig your portfolio.
The year 2020 has been surreal, to say the least. The markets touched a new high in January and fell significantly in April and May due to the onset of the COVID-19 pandemic. They have now made a tremendous comeback as both NSE Nifty 50 and S&P BSE Sensex recorded their fresh peaks in the first week of December.
If the investors lost confidence in markets in May and pulled out their money, they would have suffered a heavy loss. The ones who continued to stay invested are now seeing their investments providing good returns as the markets have peaked. Now, the question is, should you rejig your portfolio as the new year approaches?
Well, before you decide on rejigging your portfolio, you need to assess the following:
1) Check if your goals have changed: If there is any change in your requirements, then you can exit some of the investments which no longer serve your purpose and move to those investment options that are in sync with your new requirements.
2) Understand your risk appetite: If you have reached a situation where your risk-taking ability has changed, then it is essential that you relook at the constituents of your portfolio. You have to analyse each of them and retain only those whose risk levels match your risk appetite. You have to exit those that carry excessive risk.
3) Check if your portfolio is balanced: If your portfolio is concentrated towards a particular stock or sector, and now you want to diversify across sectors and capitalisation, then it’s high time to rejig your portfolio. You will have to come up with a plan to diversify your portfolio and choose only those securities that are in sync with your goals and risk appetite.
4) Be clear with your investment horizon: If you started with a short investment horizon, and it is now extended, or vice versa, then you have to make changes to your portfolio accordingly. If your portfolio consists of securities that mature shortly and now, your investment tenure is longer, then you may consider exiting the current holdings and enter those securities that match your investment horizon.
5) Check if a particular stock or sector is expected to do well: Markets never remain the same. In fact, market movements are the only constant when it comes to equity investments. If a particular stock or sector is expected to do well, and if you don’t have any of those securities in your portfolio, then you have to rejig your portfolio and make room to include instruments that may do well.
For instance, the pharma sector is touted to do well in the coming days as an effective COVID-19 vaccine may be released soon. You may consider gaining exposure to pharma securities if your risk profile permits.
6) Analyse if a sector or stock is going to underperform in the coming days: If a stock or sector has a high chance of underperforming in the days to come, and you have a short investment horizon, then you may consider exiting from these holdings and rejig your portfolio accordingly. Most equity-linked instruments are expected to perform well when the investment tenure is longer than five years. However, there are certain factors beyond your control which can sometimes make the securities remain subdued for an extended period. This is when you have to carefully assess the situation and determine if you should rejig your portfolio.
After you have assessed the above, you may consider rejigging your portfolio if needed. If you find this a daunting task, then you may consider seeking professional financial advice.
When you are about to rejig your portfolio, you have to essentially understand the risk levels and objectives of the securities to be included in your portfolio. Having the right plan to rejig your portfolio ensures that you achieve your goals sooner, and the journey towards the same is made more hassle-free.
You shouldn’t ignore short-term goals while rejigging your portfolio. You have to essentially allocate some portion of your portfolio towards short-term requirements as well. Not to forget, have an emergency fund to deal with the unexpected expenses.
It is imperative that you have good health insurance coverage so that you keep away from the hefty hospital bills. The COVID-19 pandemic has shown us the importance of a health insurance policy. Having the right policy ensures that you don’t touch your investments for medical needs.
With about three weeks to go for the start of a new year, it is essential that you look at the performance of your investments and assess your goals, risk profile, and investment horizon to eliminate certain securities from the portfolio if necessary or add particular instruments so that you accomplish your goals sooner. If your investment portfolio is already optimised and is set to benefit from the market outlook, then there are no reasons to make any changes.
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Engineer by qualification, financial writer by choice. I am always open to learning new things.