5 red flags to watch out for in your portfolio
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Most people are wary of taking risks with their investments. However, many only realise the risk in the portfolio only when they lose money. And by then it is too late to do anything to reduce the risk. Here are five signs that you may be taking on more risk than what you are comfortable with. If any of these apply to you, then it is a good idea to rework your portfolio and prevent a fall rather than wait for it to happen before you take action
Blink and it is gone
If you feel the need to frequently check how your investments are doing, then you have a problem. The daily stock market levels or domestic and international developments should not be factors that spur you to buy or sell. It is an indication that you are holding an extremely tactical portfolio, where the focus is less on your goals for which you are saving, and more on beating the market. Unless you are adept at reading indicators and moving your money accordingly, there is more than an even chance that your money will be at risk from wrong calls.
Financial advisers use many tools to gauge an individual’s risk taking ability. “Arriving at a client’s risk profile is a systematic and scientific approach. The ideal way to check one’s risk tolerance is by using a questionnaire methodology wherein through the answers one can gauge the investor’s attitude towards money. She may feel that she can take risks, but when there is a loss, the investor gets impacted,” said Anil Rego, founder, Right Horizons, a Bengaluru-based financial advisory.
Apart from the risks, such portfolios also suffer from high costs and taxes as you move money in and out. A tactical investment strategy is not sustainable given the skills, time and costs involved. A strategy that will work is to build the portfolio based on your needs. Decide on the asset classes— equity, debt, real estate, gold—based on the investment horizon of your goals and your need for income, growth or liquidity.
Select investments based not only on their immediate performance but also on their sustained ability to perform in line with their stated objectives. And don’t forget to monitor their performance; not daily, but annually or bi-annually, and make changes only if the reasons why an investment was selected is not valid any more.
Too much of a good thing
Too much of anything is bad for you, and that holds good for your investments as well. If most of your money is tied up in real estate or equity or any other single asset, then you are asking for trouble even if your preferred investment is doing well.
You should allocate funds to different assets that meet your needs so that your portfolio is not tied to the fortunes of any one type of investment. A downturn in one investment is likely to be balanced out by an upturn in another, thus reducing the risk of a deep cut in the portfolio.
However, make sure that you do not over-diversify your portfolio. “One should ensure that she does not have more than 10 products in the investment portfolio. This can be the sum total of one’s provident fund, real estate, and debt and equity mutual funds. One should ensure that even in her allocation to fixed-income, the count is not be more than three or four. Equity funds should also not go beyond four or five in the list,” said Amit Kukreja, a certified financial planner and founder, WealthBeing Advisors.
You should know that the biggest problem with an over-diversified portfolio is that of neglect. You are not going to be able to give the same attention to all the stocks, bonds, mutual funds, fixed deposits, real estate, and everything else that you hold.
Do a spring cleaning of your portfolio and consolidate your investments into a number that you can manage and which meets demands of your goals.
“Over diversification causes under performance as even outperforming securities or funds will have no impact on overall portfolio performance due to their low weight. Under diversification, on the other hand, increases the risk in the portfolio,” said T. Srikanth Bhagavat, managing director and Principal adviser, Hexagon Capital Advisors Pvt. Ltd.
No risk, no return
Holding your investible surpluses in cash or low-yield investments when your goals are well in the future may indicate that you are under-utilising your money. Instead, the long investment horizon can be used to your advantage by investing in assets such as equity, where time is essential to ride out economic cycles while creating significant value for the investor. “The idea is to ensure that your returns beat inflation. Low returns can be inferior than inflation and it means your corpus, despite being invested, is losing its purchasing power or value with time. Hence, one must ensure that even by investing, with the safety of capital as an objective, the returns must beat inflation,” said Kukreja.
Have systems in place to invest your savings. Facilities like systematic plans and sweep-in facilities will make sure your money is not idle. Do this according to an investment plan linked to your goals so that the risk of underfunding the goals is reduced.
Listen to the silence
If you do not get periodic information about the investment you have made, if the broker does not keep you updated, and the investment provider is missing statutory disclosures, then there is a good chance that there is likely to be a default. As a rule, investors get bombarded with mails from the investment provider to encourage them to invest more. Silence means things are not going right. When this happens, try and withdraw your money at the earliest and not wait optimistically that things will turn around.
Investing in well-regulated products and going through investment providers with experience, is one way of protecting yourself.
If a large portion of your portfolio represents recommendations and advice from friends and people who claim to know the next sure-fire investment, then there is a good chance your portfolio is in all kinds of trouble. The investments suggested may be unsuitable to your goals and needs, or they may be riskier than what you are comfortable with.
Check the following parameters for gauging your risk taking profile: dependents, assets and liabilities, exposure to assets, variability of income, age, lifestyle and attitude towards risk, said Rego. Take a hard look at the investments. Keep only those that are aligned to your return and risk preferences, and look for ways to exit from the rest at the earliest.
You may do everything right in constructing your portfolio and still be faced with a situation where some investments may turn out riskier than you would like it to be. Periodically aligning the risks in investments to your risk tolerance will help you weed out the outliers.
Don’t evaluate the risk and return in an investment in isolation. Instead, see it in conjunction with your goals.