Financial Portfolio Review - Reasons and Benefits

The importance of reviewing your Financial Portfolio

Roboadviso     Financial Planning     Posted On, Fri 29th June, 2018     No comments

The investment portfolio of a person helps him/her achieve his/her financial targets and life goals. It is therefore vital for every investor to periodically review, cleanse, and rebalance their financial portfolios.

Just all other things that are often important in life, this aspect of regular review of financial portfolios is also often procrastinated or ignored, thereby triggering a big setback towards accomplishment of one’s financial targets. The main reason for reviewing and rebalancing of the portfolios is to ensure that all the investments keep working towards the financial goals first set by you and to prevent your savings and investments from drifting away from your life goals.

One also needs to keep in mind the fact that market volatility can result in a reduction or increase in the total value of your investment assets, which in turn can make your investment portfolio either too conservative or too risky. When the portfolio is not updated to match the rises and falls in the market, then it can place the investor at a great disadvantage. Then there is also the possibility that you may have changed your financial goals, which cannot be met by the old portfolio, thereby needing a review and rebalance!

In all of the above mentioned scenarios, it is important for all investors to regularly visit the allocation of assets in the portfolio and reassess them, ensure that they are synchronous with your risk ability, take steps for improving your total investments along with increases in salary, and remove all mutual funds and sector-specific investments that are harmful to achievement of your financial targets.

Additionally, investors may conduct review of their investment portfolio by examining the returns provided by your assets over a period of time and then comparing that data with the historical returns of benchmark and category indices during that same time period. The ideal option is to carry out such reviews and rebalancing of the financial portfolios once every 6 to 9 months.

Observe and understand the varied economic and financial trends

During the period of review, it is important to study and understand different trends associated with movement of the rate of interest, the rate of inflation, and the yields provided by different financial products including the equity markets. Also, it is important for investors to be vigilant about varied new financial products that get launched into the markets on a regular basis.

It is recommended that investors avoid playing with their portfolio over the short term, say every 1 or 2 months. The scenario of carrying out minor tweaks in the short-term can be tempting, but it can turn out to be more damaging than helpful. It is however vital to review and rebalance the portfolio whenever there are structural macroeconomic changes. Some examples of macroeconomic structural events are listed below:

  • A major change in the economic outlook over the long term. This can be a change in the sovereign (country’s) rating, war, the ability of the government to uphold fiscal caution, political volatility/uncertainty, etc.)
  • The Price to Book Value, the Price to Earnings ratio, and other indicators of valuation so as to reach the best percentage-wise allocation of assets for investments in different equity instruments.
  • In case of investments in debt instruments, one has to check on changes in different trends over the long term, often linked to rate of interest, inflation, and credit ratings, etc.

Last but not the least; investors also need to keep a lookout on the returns earned after taxes. This means that investors need to hold different kinds of assets for different time period as mention in the Indian Income Tax Act, 1961.

It is important to take note of the period when making decisions about varied investments as varied classes of assets undergo varied cycles and it is essential to invest or exit at the correct time during the cycle. Doing so will allow you to gain from the holding time period that is essential for qualification for long term capital gains and the advantageous tax options it comes with.

One of the most important subsets of any person’s life is their financial security and investment goals. Hence, lack of a disciplined system of review can result in a massive deviation which can then turn into an undesirable liability over the long term.

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