Portfolio Balancing

I thought i would write this post to help understand what one needs to cognizant of while Portfolio balancing.

There are a few important Rules that we should keep in mind when we look at creating our investment portfolio

1. Your Risk Appetite

Understanding your risk appetite is extremely critical before you start off on creating your portfolio. Risk identifies what Loss you can afford to bear.
I have purposely not mentioned what Gain you are targeting because while we concentrate on gains we forget that the higher the opportunity of gains , the higher the risk of LOSS.

Another way to look at Risk is to evaluate the risk you can take basis the liquidity of your investment
An example is that you can invest all your money in a house-- but selling a house and getting your money is not that easy-- it requires effort and time. In an Urgent sale you will also not get your property's worth

2. Your Investment Horizon

Your investment horizon defines what product you will invest in. If you need money in the next few months for something that has been planned, then you will invest in short term instruments.

Some diktats's here
a. Ensure that your goal horizon and the investment horizon match. -- This implies that if you have a short term goal you will not use a long term instrument to save for it. One example is using a mutual fund SIP investment to save for a life insurance premium every year. If the market falls-- then you will not have the money saved to pay off your insurance

b. The shorter the goal-- the lower the risk appetite-- this will help ensure that the goal will be met with the lowest risk possible

3. Your Goals and the time to achieve them

This is critical.. If you have time -- you have the opportunity to compound your returns( read my previous post) and hence can afford to have a lower risk taken.



These 3 rules in a combination will give you some basic direction to create your portfolio. However it is important to remember that your portfolio needs to be balanced almost every year-- because your position in these rules will change with age, the changing environment and your goals.

I hope this post was helpful-- It definately gave me more clarity as i wrote this-- and helped me identify a few mistakes i am making-- which i will correct immediately!

Happy investing