A portfolio is built around a family’s risk profile, return expectations, time horizon, liquidity needs, taxation and diversification. In that sense, it is purpose-built, designed for specific outcomes rather than market conditions.
Such a portfolio carries a strategic intent. It does not require constant alteration in response to market swings, new asset fads or even disruptive global events. movements, a new asset wave, a catastrophic event, etc.
Yet, amid the ongoing war, trade disruptions and energy uncertainties, a common question persists: does this environment warrant a ?
Portfolio changes
Portfolio changes are suggested when some scheme or product is underperforming. A shift is needed to another similar but better-performing scheme.
Sometimes, a particular product may no longer be suitable due to a change in personal circumstances, taxation or other reasons. In such a situation, a careful evaluation is done for suitable alternatives.
New goals can emerge after the arrival of a child in the family. Events like an accident, separation, or a major illness resulting in loss of employment could warrant a major plan and portfolio rework.
When it is not needed
Many people believe portfolios must be constantly monitored and adjusted to optimise returns.
Also, people believe they need to ride the crest of every asset wave. When equities are roaring, they want all their money there; when gold starts shining, they want a piece of that action. It is very difficult to time the right point to enter a cycle, or even the right point to get out of one to get into another asset that has started surging.
What is truly needed is ensuring desired outcomes, meeting goals on time and building wealth over time. For that, portfolios need not be modified and recast frequently.
Right approach
Many wonder what the right time would be to enter an asset and exit it. The foundation of portfolio construction is strategic asset allocation, determined by individual goals and constraints, rather than market cycles.
Strategic allocation needs to be maintained within the optimal range (as asset values keep fluctuating). Based on changes in asset mix, portfolios could be rebalanced annually or at longer intervals.
This rebalancing need not be done by cashing out existing assets. It can be done by cashing out components that need to be brought down and using it for goals, redirecting monthly surpluses or other surpluses (like a bonus) to other assets, to bring down the asset exposure in the portfolio, redirecting underperforming assets to other assets during a portfolio rejig, etc.
Hence, maintaining a certain strategic allocation is an accepted principle in financial planning, and any tactical calls can be made at the fringes, if at all.
What to do in the current situation
While the current situation may seem unprecedented, we tend to forget the enormous turbulence the markets have faced earlier. The uncertainty during covid was extreme. We have faced the brunt of the global financial crisis, epicentered in the US in 2008. These were far worse for the economy and the markets. Yet we have recovered from these crises.
It was not possible to just move around to some other asset to stave off disaster, without great damage to the portfolio. At the time, it was a thick, enveloping fog that offered no clarity. Any changes made during such periods of major volatility do not end well.
During the storm, it is best to wait it out. If the portfolio has been well constructed, there is no need to change it just because the situation is volatile.
Being prepared
With the global uncertainties, there are some mitigants. The first is to increase the liquidity we maintain from three months of expenses, including loan servicing, to a higher amount, such as six or even nine months.
If proper planning is done, there would be a provision for goals coming up to three years. It would provide a substantial relief, even if there is enormous market turbulence in the interim.
The other suggestion is to provide robust contingency and emergency measures to address disruptions caused by the current global turmoil.
is an asset in itself. Dismantling it in response to uncertainty can be more damaging than the uncertainty it seeks to avoid.
Suresh Sadagopan is managing director & principal officer at Ladder7 Wealth Planners and the author of the book “If God Was Your Financial Planner”.