Diwali, the festival of lights, is a celebration of the victory of good over evil. It is the time of the year when we are reminded of the importance of knowledge and how it always wins over ignorance. For most of us, the week preceding Diwali is all about cleaning our homes, removing unnecessary clutter, and making space for positive energy.

It is time to let go of the old and ring in the new. It is a time of hope and optimism. While we celebrate Diwali with our family and friends by bursting crackers and/or exchanging sweets, the essence of the festival can be applied to all aspects of our lives. Today, we will be talking about your investment portfolio and how you can declutter and consolidate it this Diwali.

What is Clutter in an Investment Portfolio?

How many investments does your portfolio contain? Include all stock investments, mutual funds, fixed deposits, and any other investments. If you have been investing for a few years, then chances are that you would have accumulated a handful of investments. The reasons can be many with the primary one being ‘diversification’. 

As an investor, you would have heard/read many investment experts talk about the benefits of diversification and the reasons why you should invest in multiple securities to minimize risks. Unfortunately, most of these experts don’t talk about how many securities you should invest in. How much is too much?

Typically, for someone who has been actively investing for five years and more, the portfolio consists of alot of investments. In most cases, these have been made over time considering market conditions or personal financial changes. However, having so many investments has a downside – monitoring them can be a challenge.

While you might argue that having more investments means more diversification, usually, such portfolios have investments from the same universe that don’t do much for diversifying the portfolio. 

For example, if you are investing in stocks and decide to diversify across market capitalizations, then you will try to purchase stocks of companies with large, mid, and small market caps. To diversify your portfolio further, you might decide to invest in stocks of companies from different industries or sectors. Hence, you will buy stocks from banking, pharmaceutical, IT, and other sectors. This diversification is healthy. However, if you believe in small-caps and invest only in small-cap companies from different sectors, then your portfolio can become skewed towards them. To create a balance, you might try to increase your holdings in mid and large-cap companies causing an increase in the total number of stocks in your portfolio. If you have 20-30 stocks apart from other investments, how regularly do you think you will be able to monitor them? 

While this is one example, there are many reasons behind an investment portfolio getting cluttered. Hence, as a prudent investor, it is important to ensure that you de-clutter and consolidate your portfolio at least once a year. And, what better day to do it than the auspicious day of new beginnings – Diwali.

Keep it Simple

At any time, try to take a bird’s-eye view of your investment portfolio. If you want to diversify your stock investments, don’t start buying unless you have a plan. While you can invest across market capitalizations and industries, try to create a plan where you are not duplicating investments (with a diversification perspective).

As an individual investor, always try to keep your total number of active investment to less than around 15. This can allow you to monitor them regularly and rebalance your portfolio efficiently.

Also, choose the investment avenue wisely. For example, if your portfolio has stocks of HDFC Bank, ICICI Bank, and other large-cap banking companies, then it would be simpler and smarter to purchase a mutual fund that invests in large-cap banking stocks. By doing so, you can get rid of all the banking stocks while retaining exposure to them. Also, you will just have one investment to monitor.

Action Point

Less is more. 

Check if you have too many investments in your portfolio focused on one aspect, for instance, 5 stocks to gain exposure to the large-cap segment or 7 debt mutual funds to increase low-risk investments. Unless necessary, you might want to reduce the number of investments and make your portfolio easier to manage.

Remember, in the investment universe, SIMPLE is always better than COMPLEX as it allows you to stay in control of your investments and make decisions at the right time.

Assess if Your Investments are in Sync with Your Investment Plan

The three pillars of successful investing – financial goals, risk tolerance, and investment horizon help form an investment plan that is tailored to each investor. This is important to ensure that all your investments work in tandem and help you achieve your financial goals with ease. However, if you are an active investor, then you will come across investment opportunities that might seem too lucrative to let go of even if they don’t fall within your investment plan. 

For example, a new company can get launched with an innovative product that is expected to bring about a huge change. It is a small-cap company and carries high-risk. Even if you have a medium-to-low tolerance for risks, you might buy stocks of the company since the opportunity might seem good. 

Regardless of how the investment performs, over time, you would accumulate a lot of investments like these that are not in sync with your investment plan. Such investments can clutter your portfolio and blur the focus. Hence, ensure that you weed out any investments that are not helping you achieve your financial goals or diversify/hedge risks.

Action Point

Don’t carry a sword into a gunfight! 

Analyze your investments and identify the ones that are not in sync with your investment plan and weed them out. 

Conduct an Annual Rebalancing of Portfolio

While on the topic of de-cluttering or weeding out redundant investments, let’s quickly talk about portfolio rebalancing. Even if you have hand-picked all investments to be in sync with your investment plan, the market is a dynamic place and some investments can turn into dead weight over time. While portfolio rebalancing should be conducted regularly, you can also make it a part of your annual Diwali-Portfolio-Makeover. If you want to read more about the benefits and strategies of rebalancing your portfolio, then visit our detailed blog on Portfolio Rebalancing.

Action Point

Walk the line! 

A healthy investment portfolio is about having the right type and number of investments to help you reach your financial goals and relevant to the market conditions. There are many variables that can affect the efficiency of an investment portfolio. Hence, regular rebalancing is a must. Once a year, take an overview of the portfolio and rebalance it with a long-term view.

Summing Up

Diwali is symbolic of ushering in the light and getting rid of the darkness. This Diwali, allow the light to enter the dark corners of your investment portfolio that haven’t been visited since you made the purchase. Dust and clean it, and discard everything that is not needed to make space for new investments to take their place and boost the performance of your portfolio. Wish you and your family a very Happy Diwali and a prosperous New Year. 

Happy investing and a very happy Diwali!