Posted On: January 12, 2022

How to build a portfolio of stocks – a step by step guide Step 4: Optimizing and rebalancing the portfolio

As a good gardener tends his garden constantly pruning the leaves and tending the plants, managing your investments requires constant care, affection and tending.

You need to look at 

  1. your portfolio’s overall growth
  2. the movement of prices in each stock compared to the target prices you had in mind when you bought them
  3. the overall market trend and macro movements that might impact your stock

based on these you will decide on the following

  1. likely price movement of your stocks
  2. the stocks that you might want to exit as you might believe the stocks are likely to go down
  3. the stocks you might want to add to as they are likely to move up

All these decisions would be driven by your goal.

At the start of your investment, your goal was to invest Rs. X for a period of P to return you a value Rs. V which is more than your investments Rs. X.

Typical way to manage this is to break down your required value into 3 month periods (quarters) across your investment duration and look for portfolio of stocks that will give you the best possible return to meet the quarterly duration

Along the way, you might end-up retaining some stocks for longer period than others as they might be expected to yield higher returns.

By this constant monitoring, selling, and buying, you are optimizing the portfolio to keep it on the trajectory to meet your total required value.  This process is called portfolio optimization.

Occasionally, you will also want to review the entire portfolio to look at your portfolio’s risk to return trade off.  This process aims at reviewing the entire portfolio and identifying the stocks that give higher risk, identifying options to reduce the risk and leveraging these opportunities.  It might involve selling some or part of your holdings and buying new stocks.  This process is called rebalancing.

Conclusion:

  • Choose your funds carefully. 
  • Make informed choices based on the underlying assets held by the fund (the fund’s portfolio). 
  • Be cognizant of the asset allocation skew that the new portfolio brings to your overall portfolio.

Happy investing !!!

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