When we meet the doctor with our pains and problems, we are more than willing to follow all his instructions. We religiously buy the medicines, and follow the dosages until we feel better. But then most of us give the ‘follow‐up’ visit a complete miss. Not intentionally, but the motivation to see the doctor which was so high when there was a problem, is lost after the initial action.
Our portfolio can suffer from a similar lack of motivation to review and revise it. A financial decision, much like the decision on our health, needs review and revision. Our portfolios need review because the market conditions or our financial conditions may alter over time. We could have allocated 20% of our savings to the equity markets; but the boom over a 4‐year period could have taken the value of our equity investment to 50% or more. The question to now ask is whether we can take so much exposure to equity. If our ability to take risk is low and if our time horizon for that investment is less, we have to prune our equity investments back. We may have loved the appreciation equity gave us during our earning days, but as we near retirement, our need for preserving capital and earning a regular income from it, increases. We have to review the portfolio and rebalance it to move from equity to debt, in view of our changing needs.
Sometimes we may expose our portfolio to risks when we do not review how it is performing in relation to the market in which it is invested. A short term debt fund may do very well when interest rates are rising; but it may begin to taper off when interest rates begin to fall. A change in the interest rate cycle from high rates to low rates, means we need to move our funds from short‐term debt funds to longer term debt funds. Without the review of our portfolio, we may be stuck with a product that is inappropriate given the market cycles. A small‐cap fund may do very well in a bull market, but a bear market would mean that a large cap blue chip fund would do better. Without review and rebalancing, we may miss the changing market situation.Does it then mean that we keep changing our portfolio from time to time? Not really. Too much of meddling with the investments will actually increase our costs and can result in losses from trying to correctly time the market. Every time a portfolio is reviewed and rebalanced, we take a call on what to sell and what to buy. Both legs of the transaction have to be based on a sound understanding of our needs first, and the ability of the market to satisfy that need. If our decisions are merely based on whims and fads, we may end up losing. It is very important to not be taken in by current fads and favourites. When there is a rush to buy into something because everyone else is doing so, we may risk our portfolios by deciding without considering our specific situation and preference.
Over time, investors can observe and understand the investment philosophy and process of a fund house, its approach to constructing the investment portfolio, and its abilities to monitor and review the mutual fund portfolio. If investors based their choice of funds and review to align the fund’s philosophy to their own, they are likely to be happy investors.We all love to buy and the top and sell at the bottom. But is we bought when everybody else did, we would invariable buy at the top. If we sold when everyone else seem to be selling, we are likely to sell at the bottom. We then cannot blame the markets or funds for our portfolio losses.