These trying times have taught us to slow down and self-reflect on many things in our life. It has signalled to act on certain tasks which we may have procrastinated for a really long time. Like for e.g., people are taking some time out to declutter their homes. It is actually very therapeutic. It is like decluttering our minds because we then have to focus on lesser things. Less is more! This virtue can be extended to our financial life. This lockdown presents an opportunity to declutter your investment portfolio.
Why cleansing is necessary?
In my professional life spanning over 35 years, I have come across many portfolios of clients with long forgotten investments accumulated over years. It is akin to junk stuff which people tend to stock pile over a period of time and don’t know what to do with it. It ranges from penny stocks, loads of mutual fund schemes and insurance policies. Such a portfolio mountain can become cumbersome to manage and investors eventually lose track of what they had bought.
Decluttering the portfolio is thus essential. Doing this would enable you to focus only on the most important aspects of your financial life and help you to reach your goals. Here is how you can go about it:
Define/Review your Financial Goals: You need to define your financial goals first. Consider the time horizon of these goals – both long and short term. If you had already defined goals earlier, it is prudent to review the same every year. Clarity on goals will throw light on the kind of investments you want to retain in your portfolio – be it related to retirement, child education, house purchase, etc.
List out your existing investments: Make a list of what you have in your portfolio. Segregate them as per asset class i.e., how much money is allocated to equity, fixed income, gold, real estate, etc.
Decide which investment to get rid of: Once you have listed out all your investments, you might be surprised to view your portfolio in totality. Check out for the following things:
Find out if your portfolio is heavily tilted in favour of any one asset class. For instance, if your portfolio is majorly inclined towards equity, then you may be taking way too much risk which may not be suitable for you. Ensure that the ratio of equities to fixed income is as per your age and needs.
Further, overdiversification is a sin in the world of investing. Find out if there are too many mutual fund schemes or with the same theme overlapping one another. These would move in a similar trajectory and such duplication would affect the total portfolio returns. Also, discard mutual funds which have been underperforming their respective benchmark and peers for a long time.
Get rid of penny stocks which you may have bought for speculative purpose and now are languishing in your portfolio for a long time.
Review your insurance policies. If there are too many investment-based policies where you are paying heavy premiums with little cover, then replace them with an adequate term cover. If only 3 years premium is paid, you can surrender the plan. Another option is to turn it into a paid-up policy. You can retain the ones which are going to mature in another 3-5 years as you will lose several maturity benefits.
Finally, you need to evaluate whether your existing investments are in sync with your goals and are a right fit for your total portfolio.
Know the impact of taxation: As you declutter your portfolio, do not forget about the impact of taxation. When you sell your investments, check out your capital gains tax which you might have to pay or the loss you will bear. Evaluate if some of the losses can be offset against your income.
Restructure your portfolio with assets in proportion which are suitable to your risk-taking capacity and which are aligned to your goals. In this entire exercise, there is a big possibility that you will suffer losses in the short term. But it is necessary to consolidate your assets and take a hit now. This will prune your losses which you eventually will more than recoverin the long term. Do not cling to your mistakes.
With the lockdown probably affecting your income, if not fully, decluttering your portfolio will be very effective. It would give you an opportunity to free up your cash flows and channelise the same in the right products. You can take the expert opinion of a professional investment advisor who can help you see the big picture in your financial life. More importantly, to avoid clutter to return to your portfolio, keep regularly reviewing it and align your new investments with your goals.