Here's Why You Should Focus on Building a Robust Portfolio Strategy

Jan 18, 2021

The key to a financially secure future lies in sowing seeds of worthy investments at the beginning.

But what constitutes a worthy investment and how can these worthy investments truly secure your financial future? This article explains the finer nuances of a robust portfolio strategy...

While mutual funds are a promising investment avenue for wealth creation, yet each individual holds different goals, risk appetites at various phases of their life, and time horizon to achieve those goals. So, your portfolio strategy should be personalised and not in accordance with a friend or relative's.

This is why it is beneficial for you to consult an unbiased, certified and well- experienced financial advisor.

The portfolio strategy is a roadmap through which investments can be made to achieve your financial objectives. Note that when you are investing in mutual funds, there is no one-size-fits-all type of portfolio strategy.

An intelligently crafted portfolio strategy is based on your financial objectives, risk profile, and investment time horizon. The right portfolio strategy enables you to invest in mutual funds across suitable categories and in the right proportion. Each category of fund has a different risk-reward relationship and may or may not be suitable for your risk profile. Your portfolio strategy may differ depending on your age as well as financial circumstances.

With Indian equity markets hitting all-time highs over the past few months, from an investment standpoint, we are starting 2021 on a good note. The rally is influenced by the positive developments surrounding the approval and implementation of the COVID-19 vaccine, which has sparked hopes of normalisation and a faster global economic recovery ahead.

However, let's remember the lessons from 2020, which highlighted the impetus for a solid financial plan. As part of your 2021 New Year's resolution, many of you are probably looking to develop your investment portfolio strategy, and/or review and rebalance your existing portfolio strategy.

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To build a robust portfolio strategy for a healthy financial future, you could consider these steps listed below:

Step 1: Set S.M.A.R.T financial goals

The first thing to decide here is, what are you investing for?

As you start thinking in terms of goals, you get precise answers of how much money you require to invest and the time horizon you have to achieve those envisioned financial goals. You can start with a prudent budgeting exercise for goal setting. It gives you a clear view of your cash flows, expenses, and the amount you could manage for savings and investment purpose.

Get a realistic picture of your level of risk tolerance, as the markets by nature are supposed to be volatile. Your risk appetite is a measure of how much volatility or market risk you can handle. It is best to have your portfolio strategy constructed according to your risk profile.

The financial goals you set will be aligned with the investments you will make and lead your portfolio strategy towards the journey of wealth creation.

Step 2: Asset allocation and diversification

Once you determine your financial goals, the next step you take is asset allocation. This means that you begin making investments towards various asset classes like equity, debt, gold, and may be even real estate.

It's well known that for long-term goals, having a high component of equity-oriented funds is suggested because it helps beat inflation despite being volatile in the short term. For the medium-term goals, a combination of equity and debt can be used. Whereas for short-term goals, it's best to have a major component of liquid and quality debt funds in the portfolio.

There can be many combinations of portfolio strategies spread across funds and asset class in different allocation. Essentially the aim is maintaining the right asset allocation and reducing dependence on the performance of any one fund or asset class.

You see, rather than jumping from one asset or investment to another or depending on the returns, build an 'all-weather' long-term portfolio strategy with varying exposure to different asset classes. This way you ensure that the investments you're making have the potential to survive through various market cycles.

As the saying goes, "Don't put all your eggs in one basket"... so by diversifying your portfolio, you mitigate the risk across different investment styles, stocks, sectors, industries, and even geographic regions.

The asset allocation and diversification in your portfolio usually reflects your level of risk tolerance. The portfolio strategy can be described as either aggressive (high tolerance for risk), moderate (medium risk tolerance), or conservative (low-risk tolerance). Optimum asset allocation is the cornerstone of building a robust portfolio strategy.

Step 3: Maintain discipline and long-term approach

When you formulate the portfolio strategy with specific goals in mind to create a healthy corpus for the long term, be cautious of the possibility that your discipline might wane, or short-term priorities could take over, and/or the irrational market behaviour makes you rethink your investments in the foreseeable future... so plan and act accordingly.

Just the way a plant needs to be nurtured with time to bear fruits, your investments need time to reap you benefits.

One approach to counter this is the Systematic Investment Plan (SIP). It is a time-tested and evergreen way of investing in mutual funds. It is perhaps the most disciplined way of investing towards your long-term financial goals. SIP helps to gradually create a solid corpus, as you may benefit from rupee-cost averaging even if the market corrects and volatility dampens rewards.

Step 4: Do not time the market

It's human tendency to time the peak and bottom of an asset class frequently. As an investor with a long-term approach, you need to spend more time in the market rather than 'time the market'. Conducting disciplined investments over a longer period helps make timing the market irrelevant.

Besides, when you try to time the market, you may get carried away by the hype in social media, the news, or fall for the 'herd mentality' bias. All you need to do is cut out the noise and focus on relevant information to make informed financial decisions.

Step 5: Re-evaluate your existing portfolio strategy

2020 has been a volatile year for equity investors. In many cases, the portfolio strategy that comprised of investments higher than the risk appetite of the investor may have suffered a decrease in the portfolio values.

However, to overcome these losses and to ensure that you have a better portfolio strategy for 2021, consider reviewing and rebalancing it. Periodic review and rebalancing of portfolio strategy is as critical as deciding on the right asset allocation.

When you periodically review your portfolio, you can evaluate the performance of your investments vis-a-vis the benchmark as well as the expected returns. Advisably, assess and reconstruct the portfolio strategy based on your current risk appetite, the investment objectives, and if your investment is aligned to a certain goal and whether it is close to the horizon line. Once you've done that, consider if it's time to take the money off the table.

Check if your portfolio has achieved the desired asset allocation and if the weightage of one asset class has increased or decreased due to market movement. Many tend to do this only when equity markets rally, but ignore this vital step during sharp market corrections.

Also, evaluate your investments across asset classes and see if it still matches your risk profile and the time horizon required to achieve your goals. And if you wish to restart any of your investments, don't wait for markets to dip, instead consider the SIP route to investing.

To conclude...

Constructing a robust investment portfolio strategy is similar to building a house. It is a step-by-step process to create a structure that can withstand dynamic market cycles, needs a strong foundation with optimum asset allocation and a selection of the best suitable mutual fund schemes addressing your financial goals and the time horizon to achieve each goal.

Have you noticed how neither setbacks nor opportunities come announced? Therefore, you could just benefit from such opportunities by staying invested. Make sure you do not lose sight of your long-term financial goals for the short phases of volatility.

Therefore, irrespective of the investment corpus, you as an investor should follow the basic principles of investing towards your investment capital and long-term goals. Keep in mind that excess risk-taking and risk aversion have their own downsides.

It is also advisable that you seek professional advice and consultation while constructing your robust portfolio strategy for a healthier financial future.

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Happy Investing!

Author: Mitali Dhoke

This article first appeared on PersonalFN here.

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