Continuing with our series of articles on portfolio rebalancing, today we will quickly look at the mistakes investors make while doing portfolio rebalancing. If you have not read it already, do so now to find out when you should do portfolio rebalancing.
1. Getting married to your investments – This is one of the most deadly sins you could commit. Investors do not like to sell what they bought. If the product is delivering a profit, they want to hold on in the hope of more returns. If the product is giving negative returns, they want to still hold on in the hope that it will beak even some day.
Truth be told, like you recycle all your old clothes every Diwali and buy new ones, you need to cleanse your investment portfolio of all those products that are now worthless. It does not make sense to look at these worse performing products each day – they seldom move up !
When you do portfolio rebalancing, make sure you get rid of these products at the earliest. Get them out of the door first. My personal opinion on this is that it is tough the first time you do it but once you do it, then it is easier to do it again and again.
2. Timing the market – This is where the whole lot of investors try to time the market over and over again. Get it right folks, you cannot catch the last coach of a moving train – either you will fall on the tracks or have your head severed.
Investors are a convinced lot that they can master the market and often jump into the investment cycle at the wrong end of the spectrum. And when they do this, they do so with all their investments in one go. And when the cycle takes a turn, they are left with huge losses, a rotten face and an attitude of “I can still do it better next time !”.
Simply put it – avoid timing the market by all means.
3. Reviewing all the products – Investors often review their entire portfolio as a whole and leave it at that. If their portfolio has delivered expected positive returns, they are happy. They skip reviewing individual holdings. This is a mistake that needs to be avoided. A single product in a portfolio can make the overall health of the portfolio look good while the rest of the constituents might under perform.
It must be noted that one needs to review ALL the individual products you hold. Most of them concentrate on the stocks first as that is what brings the biggest excitement to investors. Some others also review mutual funds they hold.
Ensure that you review all your products – be it market linked or not. Even fixed income instruments deserve the attention.
4. Focusing on returns only – So when you do portfolio rebalancing, what are those parameters on which you will review and rebalance ? Can it only be the returns delivered ? To an extent, the answer is yes, but you need to ask yourself why the returns were not delivered, if that is the case.
Often, there will be products in the market that might under perform due to some valid reasons but they still deserve a place in the portfolio as they are the stalwarts. It does not make sense to weed them out.
Do not focus on the returns only and how much money your product has returned – ensure you hold onto it if it is the right product and will deliver good returns again. Stalwarts often do that.
5. Getting hooked onto ‘breaking news’ trends – The stock market is a funny place. Every day they have something new to sell to you. There is a valid reason behind every buy or sell.
I find that odd and funny at times but given the fact that it is possibly the most exciting part of the day for a trader and that every buy and sell fetches the brokerage house commissions, this will continue. The question you need to ask yourself is – Why do you have to jump onto every breaking news each morning and buy according to that ?
When you do this, you are deploying a part of your money in a gamble that you stand to lose against all odds. You are also playing around with your future financial aspirations and your goal based investing strategy could possibly go for a toss.
6. Ignoring asset allocation – The basic purpose of a portfolio rebalance is to stick to your asset allocation. If you sway from that, the whole purpose is lost. Remember that you need to have an asset allocation defined for yourself and then try to put that as a benchmark and stick to it.
It could mean either pulling money out of equity or debt or the either way around. Whatever it is, the basic mistake investors make is to go astray to their asset allocation strategy. Stick to it when you rebalance.
Are there any other mistakes you have made and wanted everyone to know ?
Next up – How to rebalance your investment products ?
That’s more important than anything. Thanks for your valuable inputs.
Nice article on portfolio re-balancing. As you rightly pointed, most people dont review all products and this also means they ignore asset allocation (how much toward equity, debt, gold, cash, etc.). Maintaining asset allocation will help avoid any extreme swings when one product does too badly or underperforms other products.
Very good and timely article. I am in the process of re-balancing my portfolio. Have been holding to few dud stocks, started selling some though in the minor rally last week.
I like the points 3 and 6. I strictly follow all these points while rebalancing.
Ah there you are Chirag sir ! Welcome back !
Yes Radhey :)…… I am here only following almost all your articles quickly and silently without commenting ;).