To ensure investing successfully to meet your long-term goals, you need answers to two main questions
- How much of your Investable Surplus do you invest in which Asset classes i.e. Equity, Debt and Gold Asset classes?
- When the market and specific asset prices change, do you stick to asset allocation and asset choices? Or change them?
Answer to the first question is Asset Allocation and to the second is Re-shuffling. When the market and some asset prices move significantly, it presents certain opportunities. Therefore, you need to re-shuffle your portfolio―i.e. sell assets that offer a lower risk-adjusted return based on their fundamentals, and buy into new opportunities.
Reshuffling Direct Stocks
Let’s understand how to reshuffle Direct Stocks. First, ensure only the investment-worthy stocks are held or bought. Then, compare the Future Potential Risk-Adjusted Returns for each stock, and retain the ones which have the highest possibility. For this, you need to assess the fair value of a stock based on its long-term projection, what we call its MRP. We have a process to sell different category stocks at different levels above or at MRP and, similarly to buy them at different levels of discount from their MRP. However, it’s the actual portfolio of an investor that decides whether a stock is actually bought or not.
Reshuffling Mutual Funds
For Mutual Funds too, select only the best Equity Mutual Funds that have a good Future Potential Upside and will complement your entire portfolio to add meaningful diversification and enhance returns. As a simple example, if you already have adequate Large-cap companies in your portfolio, buy a Mid, Small or Multi-cap Funds that have a good Future Potential Upside.
And, suppose if these opportunities are not available today, what do you do then? Just wait! Because, in long-term investing, assets must be bought at a reasonable price to earn good risk-adjusted returns.
The point is that when you cover multiple assets, you have more options to build a good Wealth-Creating Portfolio than either pure Direct Stock or 100% Mutual Fund portfolios.
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Read the next article to know how to manage risks in your portfolio: ‘What is your Risk Ability and Willingness/Tolerance?’
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