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Investment planning: Four steps in reviewing investment portfolio

From Warren Buffett to Bill Ackman, all the great investors in the financial world have a common trait, i.e., in-depth observation skills.

By Rachit Chawla

Investment is like gardening, it requires regular monitoring and care. And, negligence leads to the growth of weeds, not the desired fruits. In this fast-moving world, a majority of changes rely on economic factors, which are always dynamic and never constant. The financial sector, the powerhouse of every economy, runs on investment, the ultimate fuel. Any noticeable change in the economy affects the financial sector, which eventually affects the performance of various sectors in the economy and returns on investment.

Selection of the right investment options is not enough to achieve set goals until they are reviewed and checked regularly. Thereby, it is a must to review one's investment portfolio before the completion of each annual cycle. Here are some important steps that every investor should follow while reviewing her/his investment portfolio.

Eyes on economic trends

Keeping both eyes and mind open is an indispensable attribute that every investor should adopt before deciding on the portfolio. What new trends are coming into the market and what is getting obsolete should be studied by any investor planning good or unorthodox returns in the long run. Checking the progress of the investments based on the current inflation and interest rate should be the next important step of review analysis. Another crucial step in this direction is comparing the performance of various financial instruments and equities in a specific period.

Causes of change

Finding out the cause of a change is as important as noticing the change because it improves forecasting and future decisions. From Warren Buffett to Bill Ackman, all the great investors in the financial world have a common trait, i.e., in-depth observation skills. They minutely observe even the least significant change in the market and calculate how this change may affect the market and their own investments.

This quality evolves over a period of time with continuous observation, study, calculation, and implementation. One should have a knack for keeping oneself educated with every minor and major change in the economy.

Setting new objectives

Based on the observation and analysis of the current investment scenario and the returns one has received from one's investments after completion of a year, the investor must set the new financial objectives for the coming year. These objectives should be very optimistic, as well as realistic. A desired change in the investment objectives not only ensures better returns but also reduces short-term as well as long-term risks. Before finalising the investment portfolio for the next year, one should be very much clear on one's risk-taking capabilities and patience level. Whether his/her financial capacity allows to take more risks or not is a decision that should be taken after thorough self-assessment.

Asset allocation strategy

After knowing one's risk-taking capacities and setting benchmarks for it, the next step is developing a pragmatic allocation strategy based on the best available asset classes and investment tools. To ensure maximum returns from the chosen options, the allocation should be based on optimum diversification.

Allocate a calculated fund in various asset classes such as bonds, equities, mutual funds, debentures, and other alternative options. The allocation also depends on the investor's future needs and goals like a marriage in the family or purchase of a new home.

Selection of the investment options and finalisation of the portfolio is not the final step here. Now, comes the rebalance-measuring the performance of the selected portfolio against the set benchmarks at least once in a quarter is a practice that every investor must adopt, to avail optimum returns from the investment. As money plays an imperative role in making one's life easy or difficult, it is utmost important to thoroughly review and modify the investment portfolio at the completion of the year.

(The writer is founder & CEO, Finway)