A long-term investment strategy requires more than a passive " invest–and–forget" approach. Once you’ve created an investment strategy and built your portfolio, you’ve taken the first steps toward reaching your financial goals. As time passes, you will need to review your portfolio regularly to make sure you stay on track.
One reason to review your portfolio is that market conditions or some aspect of your financial situation — say, your time horizon or your tolerance for risk — may have changed since you created your investment strategy. If the change has been significant, you will need to consider adjusting your portfolio’s asset mix. Another reason you might have to considering giving your portfolio a new look is in response to a significant life event. This could be a change in career, marriage, birth of a child, impending retirement etc.
Let us consider this example, Suppose your investment strategy was originally designed to achieve long-term growth, and your portfolio consists primarily of stocks. At the end of the first year, — a year of tremendous growth in the stock market-you review your portfolio and you see that, although your bond and short-term investments have enjoyed only modest growth, your stock investments have significantly increased in value. In fact, your stock investments have grown so much that they now represent a larger proportion of your portfolio. The result is that your portfolio is out of balance as you have more money in stocks, and less in bonds, than you did when you built a portfolio according to your investment strategy. This increases your risk considerably. The solution, assuming your original asset mix is still appropriate for your goals, is to "rebalance" your portfolio -shift enough money from your stock investments to your bond investments to restore the proportions of the original asset mix. By doing so, you will ensure that your portfolio remains on the course set by your investment strategy.
Your rebalancing strategy
So where do you begin? The most important requirement is to track your investments on a
regular basis. This applies to all asset classes and not only to stocks. Most investors
track their equity assets regularly but do not monitor debt and mutual fund investments.
The first step in portfolio reshuffling is to redefine your goals and review your original
investment logic. Check out if you have any immediate financial requirements and provide
for a buffer. Review your risk-profile, and check whether your exposure in each of your
investments matches with your present risk profile. For reviewing, it is important to
consider your entire portfolio as a unit. By treating each asset class individually, you
may unknowingly increase your exposure to certain sectors. For instance the same set of
stocks might be present in both your equity portfolio as well as in a mutual fund in which
you are invested. Another point you need to keep in mind is the impact of taxes and
transaction costs.
Some of the strategies you could adopt are
Sell the investment that exceeds its recommended percentage and invest the proceeds in other investments. Any investments which have been performing badly and which have no potential to recover should be sold.
You can use these losses to offset any gains that may be generated and ease your tax bill.
Add money to investments that are below their recommended percentage.