Portfolio Management – Why Investments Need To Be Monitored

Everyone knows how to make themselves a bowl of Maggi, so we are are going to go with Maggi as our dish of choice for this analogy: When you are getting your bowl of Maggi ready, whether you use the stove technique, or the microwave technique, you will usually check once or twice if the noodles are cooked to perfection before you drain excess water and add in the spice mix. You don’t want your noodles overcooked and you don’t want them undercooked. You want it just right. Wind, wind, slurp!

If you’re going to watch the progress of a Rs 12 investment, shouldn’t you track the progress of much bigger ones? After all, just like the Maggi noodles texture is impacted by the heat and water levels they are subjected to, your investment returns are impacted by a host of dynamic forces.  Your investments need to be monitored so that you can protect your capital, know where you stand, access better growth and make the right choices for upcoming investments.  

Here’s why you need to undertake portfolio management: 

Rebalancing 

You must regularly evaluate how your investments are progressing along your envisioned roadmap and targets towards meeting short and long term goals. 

For example, maybe according to your calculations ( this is a very abstract example) maybe you have calculated that you want 30% of your savings/ investment capital in stocks, 30% in mutual funds, 30% in fixed income bonds and 10% in traditional forms of investment. 

In a few years, the first 3 categories would have grown exponentially and when you take stock, you might notice that your traditional investments represent a lot less than 10% of your investment capital. 

As a result, you might redistribute capital so as to revert to the prior – pre decided – investment proportions for each investment category. 

You might similarly want to rebalance within a specific  investment category. Investors might adjust the proportion of smallcap midcap and large cap stocks or funds, for example. Or you may want to rebalance your holdings from a sector point of view or adjust the ratio of growth versus value stocks. 

Since the value of investment capital fluctuates and does so to varying levels, regular rebalancing ensures you do not veer off course.  

Cutting one’s losses

You are not going to be able to notice, question and evaluate underperforming investments if you do not monitor your portfolio. 

Moreover, this monitoring needs to be a regular exercise if you are to root out real underperformers. Just like you would not expect a student to fail a whole year based on a single failed test, but rather from a series of failed tests and exams, so you should be able to judge your investments on repeated, long term or sustained failure to meet your expectations or reasonable benchmarks. 

One needs to make calculated moves even when cutting one’s losses. Some considerations that investors often have are

• Is this an overall bad time for the market or is the specific investment underperforming? 
• Is the reason for the underperformance a knee-jerk reaction? 
• Does investment have the potential to turn things around (based on hard numbers, not headlines and gut feelings)? 
• What will the cost and corresponding impact in my earnings be, by exiting from this investment and entering into another?  
• Do I stand to gain entry to an otherwise unaffordable investment during this down market moment, by cutting my losses here? 

As you can imagine, the investor will need to have a finger on the pulse of his portfolio to be aware of loss making investments or poorly delivering investments and to make fully informed decisions on cutting one’s losses. 

Claiming returns at the right moment 

Stock prices fluctuate on a daily basis and also witness dips and troughs in the long term. 

Some examples: 

• A stock price is likely to shoot up when the company declares dividends and will probably rationalise to a more reasonable level once the dividend is distributed. The price spike is a good time to sell. The investor might want to sell before the stock price corrects itself to a lower level. 
• When a company acquires another it’s own stock price might shoot up (aa might the stock price of the other company). This might also been seen as a good window to invest in either company. 
• All the stock prices in a certain sector might shoot up dramatically due to some announcement that indicates a certain sector might grow dramatically. An investor might choose to invest when headlines and hype are at their peak. 
• When markets are very health, mutual fund units may also be redeemed at a higher value. One would have to have been watching the growth trajectory of their unit price to make such a realisation and to act on it accordingly.

To enable subsequent selections 

Your upcoming investments should also be made with your existing portfolio in mind. It does not make sense to buy another defense stock if you already have sufficient exposure to this sector stocks and pretty much no exposure to metals or some other sector that you intend to have in your mix. 

Similarly, you’ll have to look at how your mutual funds have invested your capital. What proportion of your mutual fund investments now stand in debt versus equity. You will choose either debt or equity accordingly, right, as you go ahead? 

Maybe you noticed a pattern and would like to test out your theory with further investments. 

Similarly, some investors might buy futures and options contracts to offset risk or aim for higher targets on stocks they already have. For example a trader might have shares of stock A that he bought for Rs 100 per share. He had anticipated that the price would rise drastically but it has only risen to Rs 110. Moreover, in his portfolio monitoring he notices something that makes him predict a stock price drop next month. So he writes a contract that allows him (but does not obligate him) to get Rs 110 for the shares irrespective by the due date (which he will time for after the anticipated price drop). If the price does fall he still gets Rs 110 but if the price rises, he can choose not to exercise his contract and sell on the open market instead. 

Conclusion: Keep a close watch on your investments to protect capital and keep up with dynamic forces impacting the market.