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Posted On: January 16, 2022

How to Analyze your portfolio objectively? Step 3: Determining course of action

This is a very involving step that will determine the course of course of action for the portfolio.

Checkpoint 1: Determine the volatility in the current portfolio?

The volatility of the portfolio naturally is a weighted sum of all the individual risks of underling stocks.  Individual underlying stock’s volatility is computed using various ways, but I use the beta coefficient as the method.

Computing the beta coefficients of the individual stocks, I compute the portfolio’s beta coefficient.

Checkpoint 2: Check the asset allocation

I must determine if the current asset allocation is appropriate.  If my portfolio is overweighed on any individual stock, I need to determine the course of action i.e. keep current allocation or to reduce.

If I determine to reduce the weightage of individual stock, I have need to determine if I will increase allocation to other holdings or allocate to new stock in the portfolio.

In this example, let me determine to reduce the allocation to banks.  So the option I have is to reduce the stock holdings.  The reasons are:

1. I have few years remaining on the FD
2. Mutual fund allocations are not controlled by me

So, I focus on the areas that I can control and reallocate between the bank stocks that I hold.  

Let us say I reduce exposure to bank stocks and allocate to metals. 

Checkpoint 3: Portfolio rebalancing

I go through the following steps to determine the optimal allocation.

1. Compute various combinations of the allocation
2. Determine each combinations beta and return potential (potential Alpha)
3. Choose the most optimal beta and potential alpha of the portfolio that I am comfortable with

Now that I know the potential allocation, I set to execute them.

Check point 4: determine next rebalancing point

I need to set a data on which I will review the portfolio again and also few parameters that I need to track to help with me trigger the rebalances.

The common trigger points are:

1. The underlying raw material production / price movements since I have bought stocks in metal industry, this is imperative
2. The geo-political scenarios impacting
   1. the mining or refining of metals
   2. interest rates – since I have exposure to FDs
   3. FX rates since my stocks might be importing raw material or exporting finished products
3. A set date also helps me to review my portfolio holistically and optimize it keep on track to reach my goal.

Conclusion:

Over the course of your portfolio analysis and management, you might find different approaches and steps that might help you.  What I have shown here is by no means prescriptive.

Happy investing!!!

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