You typically start off with a financial plan which forms the cornerstone of your long term financial future. The core purpose of a financial plan is to help you crystallize your goals, translate them into financial milestones, assess your personal balance sheet and create a portfolio building plan to achieve these goals. There are two implicit assumptions in this definition of a financial plan. Firstly, your portfolio has to combine return, risk, liquidity and tax efficiency. In other words, your portfolio has to be multi-dimensional. Secondly, portfolio planning is a dynamic process and hence will have to be tweaked from time. You need to constantly keep reviewing and monitoring your portfolio mix to evaluate if the time is ripe to re-allocate your portfolio holdings. Here are some key triggers for you to re-allocate your portfolio..
The specific goal intended has been met
This is possibly the most common reason for you to re-allocate your portfolio. Let us assume that you have invested in a debt fund with a 3 year maturity to finance the margin money for your mortgage loan. At the end of the 3 year period you realize that your debt fund has generated around 14% per annum due to favourable interest rate movements. Your bank has also approached you offering to finance your margin money with a personal loan. What should you do in this case? The answer is very simple.Since your specific investment was meant for a specific goal; your primary task is to ensure that it is used to meet that goal. Once that goal is achieved, do not debate about continuing and reinvesting. Take a fresh view but do not disturb your original purpose.
Major changes are expected at a macro level
A long term portfolio should not worry too much about short term shifts. But, what if you are expecting major changes?What if you expect markets to correct by 30-35% due to something as dangerous as a sub-prime crisis? What to do with your debt portfolio if the RBI has indicated that it plans to increase rates by 200 basis points. These are major macro shifts and that surely calls for a portfolio re-allocation. You need to,however, be careful of the costs involved in the shifting and ensure that your long term goals are not impacted.
A major change in your life has taken place
Many life events actually force you to revisit your plan. Marriages, divorce, the birth of your child are all milestones that have larger financial implications. Similarly, when you have your second child, then again your original plan requires a re-allocation.Changes may also happen due to other reasons. You may lose your job or you may want to start your own business. Then you need liquidity and a nest egg to ensure that your goals are not impacted. This calls for re-allocation of your portfolio. Alternatively, you may be required to provide for the maintenance of your parents or some aged member of the family. These changes need to be factored into your plan and appropriate changes need to be made to your original plan to incorporate these shifts.
Your are overexposed to a particular investment idea
This happens so often to most of us. You have bought tech funds since you had planned a 10% exposure to sectoral funds as an alpha measure. But the prices of technology stocks have moved up sharply on the back of global digitization. As a result, the NAV of your IT fund has gone up sharply and now tech funds account for 18% of your overall portfolio.There is a clear concentration risk here. Since your original plan was 10%exposure, you can at best have a leeway of 3-4%. Anything beyond that is a call to re-allocate your portfolio to bring your tech fund exposure back to normal levels. The same applies when your debt exposure has gone up due to a sharp correction in equities. That is the time for you to liquidate some of your debt to buy equities at lower levels.
Portfolio mix has to change with advancing age
We all know of the asset allocation thumb role that your allocation to equity must be (1-your age). That means at the age of30 you must have a 70% allocation to equities and at the age of 70 you must have just a 30% allocation to equities. Frankly, this is just a thumb rule and there is not precise scientific basis to it. However, the argument is broadly correct that as your age advances then your risk appetite reduces and your portfolio allocation needs to be adjusted accordingly. This re-allocation should be automatically built into your plan. Your exposure to equity should automatically go down as your age advances or when you are approaching your goals. This needs to be built into your plan.
As we have seen here, there are a number of factors that will drive a reallocation of your portfolio; both internal and external. To a large extent, a good portfolio plan builds an element of reallocation into the original plan itself. Discretion comes into play when events outside your control force changes to your financial plan and your asset mix. That is the bigger challenge for you!
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