Basics of Personal Portfolio Management

The basic ideas behind how to manage a personal portfolio are discussed with a focus on the appropriate benchmarks for taking action.

Reactions to yesterday's post, A Mutual Fund SIP is Hope, Not a Strategy!, revealed a disturbing aspect of how many investors approach mutual funds.

They are not interested in the inconvenient truth that a mutual fund SIP may not work. They require someone to say, "continue your SIPs. They are sure to beat inflation over the long-term". Excuse me. I cannot bring myself to do that. Perhaps  because I do not sell mutual funds for a living.

Just to be clear, I too like systematic investing (automated or manual) but believe in tracking the progress of a portfolio and not hesitate to make changes to it if required. It is this aspect of active management that I hoped (in vain?) to convey in the previous post.

For what it is worth, in this one I would like to focus on the "if required". How do I know when to make changes to my portfolio.

Step 1:  Recognise the italicised  and my in the above sentence. If you cannot personalize a solution for your needs, seek professional help from a fee-only (no commissions) SEBI registered financial planner.

Step 2: Choosing the right instruments. Unless the right instruments are chosen, managing a portfolio means little.

For this, we need to understand the risk associated with each instrument. To know that we need to dig into the past. Not all past performance analysis is a waste! The future would be at least as risky as the past is a reasonable dictum with which I operate. Pleasantly surprised to know that so does Jack bogle.

When to choose equity and not to choose equity is a key decision: Equity investing: How to define ‘long-term’ and ‘short-term’

Step 3: Having the maturity to diversify. Maturity because, diversification is risk reduction via return reduction. Diversification implies different amounts of exposure to different asset classes.

Step 4: Asset allocation refers to fixing the amount of exposure so that the portfolio can produce the required amount of return after tax.

Read more:

Asset allocation for long-term goals

how to build a diversified portfolio

Deciding on asset allocation for a financial goal

There are different types of asset allocation strategies. We will assume a fixed asset allocation.

Step 5: Market movements will alter the asset allocation. Rebalancing is a way to reset the asset allocation. See: How to Rebalance Your Investment Portfolio

When should I rebalance?

This is an interesting and personalized question. It depends on risk tolerance. The risk averse can do it once a year. Other ways include rebalancing when

  • the asset allocation deviates by a set amount. From base allocation of 60:40 (equity:fixed income) to either 70:30 or 50:50. That is 10% deviation.
  • the return deviates by a set amount. Say, when equity return expectation is 10% and the actual portfolio return is 15%.
  • the market is overvalued. Say when PE >23 or something like that.

Personally I have rebalanced twice for my son's education goal.When the asset allocation was significantly off (15-20%). I don't look at the asset allocation often (although it is readily available). I just do it when I feel like it. Need to get more methodical about it. I have been lucky to have avoided a major crash when there was excessive equity.

For many (including Ashal as revealed yesterday) and me, the fixed income allocation is much higher than the equity allocation for several years because equity investing started later. So there is no need to rebalance the portfolio (for retirement in my case).

Takeaway: Have some kind of personalized strategy in place. One that will let you sleep in peace.

Rebalancing is necessary because excessive exposure to one asset class is risky - one way or another.

Step 6: Monitor volatility. I would like to note down the next portfolio returns for each of my goals month after month so that I can understand how volatile they are.

Step 7 Review performance at least once a year.  These days one can review performance every day! Since the XIRRs (returns) flash before me, I review it once a month when I sit down to invest. The individual XIRRs, and the portfolio weight*  of each fund tells me which are the main source of returns and losses.

* amount of each fund wrt to total portfolio value

The advantage of not having a SIP gives me the freedom to invest in different funds or different amounts in different funds (among 2-3)

I do not buy new funds unless a old one is exited and I rarely buy new ones. This is not some math driven strategy, and I don't know how effective it is. I am okay with doing this and I came up with this on my own. Please do not follow this. Stating this only to point out personalized plans are important. More details can be found here: How to review a mutual fund portfolio

and How to spot Mutual Fund Underperformers

All this is done with the Automated MF & Financial Goal Tracker with a few modifications to suit my needs.
Please note: I don't like SIPs because I try and max my investible surplus and cannot afford to lock that in a SIP. So I need the freedom to invest how much I want and when I want. I do not time the market. Just invest when my expenses let me.

Step 8: Review the goal requirements. The equity and fixed income corpus are linked to goal planning calculators in the above tracker. So each month I monitor  progress to financial freedom and the how much I need to invest for each goal. This gives me a sense of perspective.

Step 9 Be ready to react to sudden market movements. What will you do when the market crashes every day like in 2008 (recently)? Tough question! That is one bridge we will get to know only when we cross it. When all hell breaks loose, there is no bravery in staying put and there is no shame in booking a loss and swimming to safer shores. It is personal after all.

This is where all of the above steps matter. We will be able to react to crashes much better if we understand 'where we stand' in the investing journey.

Step 10 which also plays a role in step 9 is the exit strategy. As an example, I have been investing for my son' education a month or two before he was born.  He is now in 1st standard. I think (could well be wrong) I can afford to have a 60% equity exposure until he is in his 6th or 7th standard. Then I would like to rapidly taper it down. However, say when he is in the 5th standard, I get a bumper return then I will consider a big shift to debt. On the other hand, if there is a crash, I will probably wait a bit for a recovery.

Naturally there are theoretical scenarios which largely depends on how much the corpus is worth. We will have to take it as it comes. So a combination of steps 9 and 10 become important as the portfolio ages.

Step 11: Hope is not a strategy but a strategy is not a guarantee. All the blah blah mentioned above may sound like there is a plan in place (only may!) but does not mean it will work. There are no guarantees that any strategy will work. This is why even the strategy has to be monitored!! If something is not working, we must not hesitate to change the way we operate.

The key to all this is: It is all about me!

Personalized benchmarks are the key!

Please do not consider examples provided above as advice.

I only use my returns (individual as well as asset class), my portfolio weights and my goal planning calculator inputs and outputs for managing my personal portfolio. If that sounds too technical, please scroll up to step 1.

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14 thoughts on “Basics of Personal Portfolio Management

  1. lakshminarasimman

    it is just like growing a tree or marriage or choosing career
    majority spend their time in selecting based on certain parameters
    it is what you do after selecting like how you are dealing with ups and downs is what matters.
    just because we selected or sowed something does not itself guarantee big growth.

  2. S Srinivasan

    Your observations are very right.
    To me it's a philosophy of staying balanced within what you consider your limits are. These limits are not necessarily the same for all of us, and even for each of us - it can change because of unforeseen changes to our context.
    Very often we hear "Be greedy when others are exiting the market, and be fearful when others are jumping into it." True to some extent only. This has to be tempered with the other view "Fools dare to tread, where angels fear". This now contradicts the earlier one...

    So the challenge is to stay balanced across both these paradigms.

  3. raj

    If you dont invest through SIP. Than suppose you are invested alreadyin 5 Funds . Each month you get your salary say Rs50000. As you dont invest via SIP does it mean that each month you keep aside you saved money in Savings Bank account and wait for the market crash and when the crash happens you start buying more units.

    Can you please share your investment style ?

    1. freefincal

      No. I do not wait for market crashes. I do my best to invest at least once a month. When I do this, depends on when my expenses allow.

  4. raj

    What I am asking is that means you pump more money to same funds in which you are already invested after your are done with all your expenses.
    And invest once a month means in Mutual Fund only or some other Instruments also.

    Thank You

  5. Anand Vaidya

    I move any excess funds to a Liquid or Ultra Short term fund with NIL exit load and wait for market to fall. So on that "auspicious" day, switch from Liquid to Equity fund can be done without round tripping to Bank A/C

    I can earn approx 7-8% post tax in the LQ/UST fund as a bonus.


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