Imagine this scenario, you are a long-term investor, and the finance minister has just announced a series of measures that will surely upset the market participants. With the mobile in your hand like it is typically, you decide to check your portfolio value just 30 minutes after you last reviewed it. Unfortunately, this time you see your portfolio bleeding red, all the investments have lost significant value in the last few minutes, and the trend seems to continue.
Now, what do you do?
- a) sell the investments to walk away with at least some gain as the overall return is still positive b) ignore the falling market and remain invested.
The correct answer to this question depends on the type of investment, the objective of the investment, and the future expectations from the portfolio elements.
In this article, we will see how often the different investments are reviewed and changes that should be done in the portfolio.
The stocks are the investments that change the value significantly over the day and many times over the space of a few minutes. An investor may invest in stocks with a long-term goal or short-term goal. A long-term investor must avoid viewing the value of the stock every day (leave alone every hour). Reviewing the investment now and then may lead to investing being seen as a highly stressful task (which it is not), or an irrational decision may be taken which might be against the objective of long-term investing.
For example, suppose the value has increased significantly in the past few days. In that case, the investor may be tempted to sell the stock to pocket the gains and miss out on the possibility of higher gains in the future. On the other hand, if the stock price is falling, the investor may look to get rid of the stock to protect as much capital as possible. Still, even in this case, the investor loses out on the long-term potential of the stock.
For a long-term investor who has invested in stocks with good fundamentals, the investor must avoid looking at the value now and then as it will add stress and the fear of missing out. Instead, the investor may review the investment in stocks every six months. However, investors are also to remain watchful by keeping up to date with news of the portfolio companies, as this helps raise early flags. For example, suppose there exists a significant red flag for a company in the portfolio. In that case, the investor may review the investment and take action to protect the capital in this situation.
Reviewing their investments every day makes sense for short-term investors who have an investment horizon of fewer than 12 months and are looking to profit in the short term. However, one should note that in the long run, the short-term traders earn a return lower than long-term investors as the transaction costs and taxes eat into the return of the short-term investors.
The mutual funds are managed by professionals who have significant experience and expertise in the market. Due to the broad knowledge possessed by these professionals, the investors must avoid looking into their portfolio value daily. By checking the value daily, the investor may panic and bailout from the mutual fund in case of a financial downturn rather than trust the investment professionals.
On average, the mutual fund allocation may be reviewed yearly, especially if it can be done just before the end of the financial year to gain tax benefits if any transaction is done. The mutual fund’s performance may be compared to an index, benchmark return, or performance of the other mutual funds in the same category. If the mutual fund fails to beat the index or has weak performance compared to the competitors, the investor may then look to exit from the fund. However, before exiting, the investor must try to determine the reason for poor performance. If it is due to the inefficiency of the investment professionals, then the investor should look to move away. A long-term investor would often avoid overdoing the review and rebalance of investments as it generally takes away a decent amount of returns.
Well, you may be thinking about how you would review the investments in fixed maturity as their returns are on several occasions guaranteed and mostly capital protected, so why bother reviewing them? The answer is the PMC Bank crisis, Yes Bank crisis, DHFL crisis, ILFS crisis, etc.
The fixed maturity instruments may consist of fixed deposits or debt instruments like bonds. In the PMC crisis, the fixed deposit holders saw them being locked out on their deposits as well as in Yes Bank (although the lockout was shorter for Yes Bank). In the crisis mentioned above, there were another set of losers, the unsecured bondholders. Unsecured bonds are where the bondholders may not receive anything in case of default as they have no collateral. Hence, the unsecured bonds, even though debt instruments have a high risk.
While it is true that the chances of such instances happening are very rare, the investors of debt instruments and deposits must keep an eye on any red flag that arises in the institutions invested. Therefore, investors must review the riskiness of their investments in such corporations every year to protect them from any untoward situations.
For investors of fixed maturity schemes of the government, the review may not be necessary till maturity as the government-backed securities have a negligible chance of default.
To start with answering the question at the beginning, the decision will be based on the type of investment and the investor’s investment horizon. A short-term investor may look to move out while others may continue to hold and even try to lower the average cost by buying additional stocks or units (for mutual funds) when the market falls. The fixed maturity investors should review the risk associated with the investment rather than the value.
When reviewing the investments, the investor must ensure that the investments are in line with the investment goals, and any change in the asset allocation may be carried out in the review period.
Smriti Jain is the owner and senior content publisher at Financesmarti. Financesmarti is a website where she shares a lot of useful stuff for the people and business of India. This includes small business ideas and other banking information, as well. Smriti completed her education in science & technology from Delhi University. Smriti usually has interests in digital marketing now, and she has chosen this career for the full-time opportunity. The primary purpose of starting this blog to provide quality information on the banking industry to the people.