Listen to this article
Here’s A Surefire Way to Optimize Your Portfolio
—Said the boxing legend, Muhammad Ali.
I suggest your investment portfolio should do the same.
You might ask, what does boxing have to do with portfolio optimization?
Investments, like any PERFORMANCE sport, have everything to do with the investor’s psychology and investment behavior.
Behavior influences portfolio performance more than anything else.
Table of Contents:
- Misdirecting Scenario 1: The Diversification Confusion
- Misdirecting Scenario 2: Biased Product Marketing
- Misdirecting Scenario 3: On A Well-Wisher’s Advice
- Elimination Factor 1
- Elimination Factor 2
1. The Investment Mindset
2. The Right Investment Mindset
3. Word of Caution to Keep Your Portfolio Optimized
4. Optimize Your Investment Portfolio
i) Identify Your Financial Goals
ii) Selection by Elimination Technique
The Investment Mindset
At some point, we all have been told or often shown: “Bigger is better”
We are hardwired to believe it.
Consider two portfolios: both having investments of ₹1 Crore each.
‘Portfolio 1’ has the ₹1 crore spread across 35 instruments, whereas ‘Portfolio 2’ has invested only in 8 chosen instruments.
Which portfolio do you think would be optimal to reach the financial goals?
You’re right if your answer was portfolio 2.
It is because portfolio 1 would have diluted your effective return on investment—for the same risk!
Yet, we see hundreds, if not thousands, of investors choosing to spread their investments in a variety of instruments.
Unfortunately, “See the best investment opportunity? Let me add it to my portfolio” has become the norm today.
It is a reflection of the underlying lack of investment discipline.
The Right Investment Mindset
Your investment portfolio should be as simple as possible, goal-focused and have the basics right.
But what’s happening is the opposite and often disappointing.
If someone receives a Lumpsum today, the first thing they do is to think,
“Where can I park this money?”
But, imagine you are receiving a lump sum amount today. Would you just park the money or would you invest it for your financial goals?
This decision will make the difference between a disciplined investor and a name’s sake investor.
But before we jump straight into the optimization techniques, I feel it is very important for you to know what made your portfolio less efficient.
Here’s a word of caution to be aware and keep your portfolio optimized at all times.
Word of Caution to Keep Your Portfolio Optimized
Having the right investment mindset is a start.
But not being aware of what caused the portfolio dilution could push it down into the pit of mediocrity again.
Here are the very common scenarios or triggers by which investors get carried away and lose investment direction and focus.
Misdirecting Scenario 1: The Diversification Confusion
One core reason lies in how we process this golden advice we receive.
You may have heard the mantra:
As smart as we are, we get that diversification is key.
However, there is a classic misinterpretation of financial information!
More investors still believe investing in as many best funds possible is better than investing in selectively chosen funds.
Strategic diversification is still a widely unknown idea.
For example, I once had this opportunity to review the portfolio of a self-managed amateur investor.
His self-made portfolio had investments in 45 different instruments. It comprised 21 Mutual Funds, 16 ULIPs, 6 Insurance plans and the rest in FDs.
Despite all these, his investment portfolio missed just one thing. His financial goals!
Most uninformed investors think that spreading their investments in a wide range of funds will proportionally minimize their risks.
Unfortunately, it doesn’t. They end up investing in a lot of funds, financial instruments and rest on the blind belief that they have minimized their risks.
The crucial thing about investment risks is that you can minimize risks only to an extent. A whole lot of investment risks can only be managed nor eliminated.
Misdirecting Scenario 2: Biased Product Marketing
Even though only the investor makes the final call to invest, it is not always their mistake.
It is because you didn’t make that decision to invest in any instrument. You have been persuaded to do it.
Take a look at some of the marketing taglines,
“Fixed Deposits Are Not Subject To Market Risks! Invest Now!”
“Insure Your Life Today With Guaranteed Income Benefits”
“Invest In X NFO, More Units for Lesser Price!”
“Invest In ‘X International Fund’. Diversify Your Portfolio With Exposure To Global Market!”
The first two taglines play on the investor’s fear factor, the second on their greed factor. The last one blends both fear and greed.
I do not mean that everyone is greed-driven. However, everyone is performance-driven.
These catchy words can lure anyone to cross the line and fall for greed without realizing it.
I suggest you read “Discover Which Financial Information Can Destroy or Save Your Investments”. It should help you in picking the right financial information and how to use them effectively.
Misdirecting Scenario 3: On A Well-wisher’s Advice
It is one of the most difficult and awkward scenarios.
Imagine you are sitting with your bank’s relationship manager. He has provided you with excellent service so far. And he’s now suggesting you invest in an insurance plan and how it can help you financially.
Even if you know your portfolio does not need this investment right now, it is not easy to politely decline their suggestions.
Many investors have bought those lousy products despite knowing that it is an unwanted investment.
Keep in mind; it’s not a suggestion, it’s a sale!
It is not always necessarily bank relationship managers. It could be any well-wisher or a trustworthy friend who is suggesting you invest in a product you do not need.
Regardless of who is suggesting, if the investment product is not right for your portfolio, decline their suggestions.
It is much easier if you can express your financial awareness while declining them.
Before you find yourself in such an awkward situation, read “Ask Your Bank Relationship Manager These Questions Before Investing”
These are some of the serious factors creating unwanted baggage in your portfolio which are otherwise easily avoidable.
If your portfolio has a wide range of unnecessary investments, consider asking yourself:
Does it support my financial goals?
Did I analyze the investment’s long-term prospects for my financial goals?
Does it complement my other investments financial goals in the best way possible?
Ask these questions before you invest in any financial instrument. It will give you enough traction to keep your portfolio optimized.
Optimize Your Investment Portfolio
Optimization is much of a transformation from one phase to the next than a one-time activity.
But as it progresses you will be able to see the working of your every investment.
To optimize your investment portfolio, you must:
i) Identify Your Financial Goals:
I do not mean making a list of financial goals but to understand them inside out.
How much does your goal cost today?
How much will it cost in the year you are planning to achieve it?
How many of them are short-term and how many are long-term goals?
Are there any two goals that need to be achieved in the same year?
Associate with it in financial and practical terms.
Your answer to these questions will tell you how well you have understood your financial goals. Make sure you get the details of your financial goals as precise as possible.
This article will help you in understanding your financial goals better”: “Achieve Your Financial Goals”. Check it out!
ii) Selection By Elimination Technique:
Once you have clearly defined financial goals, it should be easy for you to identify which investments are the right ones.
Let’s jump into the selection by elimination process:
Elimination Factor 1:
Pick an investment from your portfolio.
Does it support your financial goal?
If your financial goal is due in, say 8 years, it is a long-term goal. Is this investment a good long-term investment instrument?
Is it an appropriate investment for your financial goal?
If yes, you are good to go. Keep the investment in your portfolio.
If not, get back the investments and invest them in the appropriate investment instrument.
A real-life Example:
Naren, a senior technical lead by profession, invested his capital gain from inheritance in a second real-estate plot.
He did this when his retirement corpus for financial freedom was still not achieved. And he was yet to figure out a way for his daughter’s wedding expenses.
Practically significant big long-term financial goals were awaiting him.
Naren was persuaded by his relatives about how it is always good to have more than one property. And it wasn’t hard for the real estate agents to convince him that it is the best and secure investment.
Naren was completely blindsided. He overlooked his two important financial goals for something that was not even necessary for him.
He got stuck into illiquidity of investment.
Was it the appropriate investment for Naren?
It’s not!
Here is a detailed analysis of “Why Real-Estate Investment is such a Wrong Choice?”
Even though Naren was fortunate to receive a Lumpsum, it did not make any difference in his financial life.
If you have such investments that mismatch with your financial goal, get rid of them as soon as possible.
It does not necessarily have to be a property investment. It can be a 20-year illiquid endowment insurance plan when you have financial goals lined up.
Check if the investment supports your financial goal.
If not, get back the investment, and invest it in the appropriate goal-focused investment.
Do the same eligibility factor check for all the investments in your current investment portfolio. See how many of them are not goal-focused. Remove them all from your investment portfolio.
Once this is done, you can proceed to optimize your portfolio further in the following step.
Elimination Factor 2:
It’s all about performance in this step.
Sure, there can be 10 different investment instruments that can also be appropriate for your goal.
However, not all of them always perform equally. Some are inherently always a better performer than the other.
Check if your investment is performing well. Check its track records over the years.
Has it performed well in the long-term before?
Is this investment’s performance on par with the other similar best performing investments?
If yes, you shall keep this investment in your portfolio.
Otherwise, retrieve the investment and divert it to the best performing instrument fit for your optimized financial plan.
A real-life example:
Manoj, a 32-year-old techie from Pune, has a goal set in his mind.
His goal was to save enough money for his 2-year-old daughter’s college and higher education. He did a little research and figured out that he needs to find long-term investments.
Based on that, he made two investments.
One was in Sukanya Samriddhi Yojana Account.
It is a wise decision. If you have a daughter, you know “why is it good to invest in Sukanya Samriddhi Yojana?”
But unfortunately, the other investment he made was in a ULIP.
Manoj saw an ad claiming it to be the best long-term investment. He made that decision based on the phrase “Long-term Investment”.
The worst part is, seeing that ULIP invests in equities, he wrongly associated the returns of mutual funds (12%-15% IRR) with ULIP’s (8%-9% IRR).
It took him 2 years to realize his mistake when he read this “Unpleasant Facts about Investing in Insurance Plans” A complete strip-down of all the gimmicks and exposes the so-called benefits they offer.
As soon as Manoj realized his mistake, he canceled his ULIP investment to course-correct his focus towards his financial goal.
It is a very good lesson he learned. Even better, it is a very good attitude to acknowledge mistakes and correct them immediately. It probably saved him a couple of years and a lot of mental stress.
Time to Act Now
Hoping to achieve financial goals through investments is good, anyone can hope.
But having confidence in your investments that they will help you attain your goals, not everyone can do that.
Only an optimized investment portfolio can give you that confidence.
Get rid of unfit investments. Revive your financial plan by optimizing your portfolio today.
If you have any comments or questions, write them in the comment box below.
Or are you interested in creating a Comprehensive Financial Plan for your financial goals?
Skip the queue by registering for your 30 Minute FREE Financial Plan Consultation. Click the ‘‘BOOK YOUR SLOT NOW!’’ button below.
Leave a Reply