Decluttering Your Investment Portfolio for Optimal Performance

As with many famous English phrases, William Shakespeare was the first to use the idiom ‘Too Much of a Good Thing’ in its current form. In the play As You Like It, we find this use, ‘Why then, can one desire too much of a good thing?’

Investment is an art and science. Investment diversification is a good thing and arguably, the most crucial element in the investment planning and decision process because an investor wants to reduce risks and maximize returns on investments. So, you allocate your investments across asset classes and investment types to achieve the benefits of diversification. 

However, sometimes, the diversification process becomes too much of it, resulting in counter-productive results. Hence, knowing the extent to which diversification is good is as important as diversification, if not more.

What is Uncluttering an Investment Portfolio?

We are told that too much diversification can lead to investment clutter. This is one reason. During the life phase when you work to earn, you may not get enough time to even think of where to invest. Hence, you might impulsively put your money in investments mostly without applying due diligence or seeking professional advice. You would take an easy route of investment just because your friend or relative has invested in some securities or other investment vehicles. 

Both the above situations lead you to a situation of holding a large number of investments you don’t have much control over. Many of these investments might have started underperforming or diminished in their value or gone dead or created duplicates. You end up in a mess because of the lack of well thought out investing goals and plans. 

Too much diversification can happen because you went on diversifying your investment without syncing your portfolio with your goals. Because of this, you might not have a clue as to how many investments under which all asset classes are there in your portfolio and whether they are in line with your goals.

For example, your investment profile could be medium risk but you have made investments in conservative and aggressive products. Likewise, you want risk-free but above bank-rate recurring income but you have done investments in interest accumulating fixed deposits. You might also have identical investments in shares and as well as in mutual funds.

Not just that the cluttered investments will not serve the purpose of your financial goals, they will do more harm. Then what is the remedy? You must reevaluate your portfolio and cleanse it. It is crucial to cleanse your portfolio by uncluttering it at least once or twice a year, from the time you started investing. However, it becomes unavoidable when you near your retirement.

How do You Unclutter Your Investment? 

Investment without planning is like going to a game without any game plan. You will not have any control over the game and will just have to go with the flow dictated by the opponent team, which in the case of investment is the market. If you have a plan but don’t stick to it, it may still give your negative results. In the same way, if your investments are not in sync with your goals and plans, your portfolio will be filled with unwanted and underperforming assets. Here are some tips that can help you in uncluttering your investment portfolio:

Revisit your financial goals

There is no need to reiterate the importance of setting goals for your investments. If so, you must keep reminding yourself of your investing goals. Why do you have this portfolio? Does it align with your goals? Do you have to review your goals? Do you have duplicate investments in multiple investment classes and types? Your decluttering efforts should be focused on making sure that your portfolio is accomplishing its purpose.

Financial goals include purchasing a home or car, accumulating corpus for post-retirement, the child’s higher education or marriage, etc. Begin by listing the monetary value of each of these goals after factoring in their time horizon and inflation. 

List out the investments

Next, make a list of what you have in your portfolio. Arrange them by asset class, sector, and other factors. You must see how your asset allocation looks like, and as well compare it with your goals. For funds, make sure you include their constituents since you want to make sure that your fund investments are sufficiently diversified.

Fees also matter

While you’re making your list, don’t forget to take note of the fees. Identify the costs associated with your investments. There can be chances that you can replace high-cost investments, particularly funds, with investments that will meet similar objectives at a lower cost. You can also consider your brokerage transaction fees and consider moving your accounts to less expensive brokers.

Consider the fundamentals

Review the fundamentals of your investments. Has something changed from when you invested? Review the P/E ratios, management changes, market conditions, industry outlook etc. in the recent years, and financial statements. Even if they are down at present due to market turmoil, investments with strong fundamentals are likely to recover soon. Investments with poor fundamentals, on the other hand, are less likely to recover over time, and it would be wise to offload them.

Review your asset allocation strategy

The first step towards rectifying diversification mistakes is to review and re-determine your asset allocation strategy based on your time horizon and risk appetite. When equities have the potential to outperform inflation and other asset classes over the long horizon, investment maturing after say 5 years should be done in equity Likewise, given that equities have the possibility of being volatile in the short term, risk-averse investors should go for debt mutual funds. 

Asset allocation is not just about equity and debt securities. Other investments like real - estate, gold, funds, or innovative investment vehicles like leasing investments that companies like GripInvest offer - with debt-level risk and assured return above debt - should also be considered while determining your asset allocation strategy based on your goals and profile. A well-planned asset allocation strategy will assist you to generate optimum risk-adjusted returns for your various financial goals.

Weed out Investments no longer in sync

Now that you have figured out which investments are worth holding, and you know your criteria for your portfolio, it’s time to get rid of investments that no longer fit you. Check if you have multiple products that feature the same investments. It’s time to get rid of that duplication. Has your asset allocation gone off track? Get rid of the investments that no longer fit the goals of your portfolio, and that are dragging your portfolio down.

Identify underperforming investments

Your existing portfolio may match your financial goals and asset allocation strategy, but some of them consistently underperform their benchmark indices and peer investments. Offload or dispose of the investments that have constantly underperformed their benchmark indices and peers over the past 3 years.

Reduce the number of investments in the portfolio

Another way to declutter your portfolio is to reduce the number of investments you have altogether. If you think that you have too many investments in your portfolio, you should consolidate similar investments so that your portfolio looks clean and easy to manage. 

This can be achieved by closing investments that are underperforming and or not fitting the goals and or are duplicating and replacing them with shares, debt securities, mutual funds, indexes, ETFs, sovereign gold funds, REIT etf., that fit your goals and risk profile but without further cluttering. These funds can allow you to achieve your desired asset allocation without the fuss of trying to fill your portfolio with a lot of individual stocks and debt instruments, and other assets.

Don’t neglect tax implications

As you declutter your portfolio, don’t forget about taxes. When you sell your investments, you might have taxes to pay, either on long term capital gains, or short term gains, or dividends or interests. Review the investments given the changes in tax regimes.

Review Your Portfolio at Periodical Intervals

Once you have decluttered your portfolio, remember to review it at regular intervals, at least once or twice a year. This can be scheduled for any auspicious day or festival times like Diwali, Christmas, Eid or New Year. In India, Diwali is celebrated as a festival of new beginnings and the triumph of good over evil, and light over darkness is the ideal time to weed out everything bad and wrong. 

Decluttering would help you to rebalance your portfolio in line with changes in your risk profile, financial goals, various macro-economic factors and market fundamentals. Making sure you are on track and get rid of investments that aren’t helping you reach your goals is a mantra to follow in building an investment portfolio.