Resolution 2020: Reshuffle your portfolio

The need to reshuffle your portfolio arises from a variety of reasons. Here is the why, when, how and what of portfolio reshuffling.

Jan 01, 2020 12:01 IST India Infoline News Service

2020 Resolution
As a tumultuous decade comes to an end and a new decade comes into being, it is time to look ahead with hope, optimism and a sense of strategic intent. The last 10 years may have seen capital markets create value without commensurate growth in earnings and GDP. But, the next decade is likely to be very different. As the global economies look to a sharp rebound, India and China could lead the way. What does that mean for your portfolio? It means that you need to reshuffle your portfolio to make it slick enough for the next decade. Here is the why, when, how and what of portfolio reshuffling.

Why to reshuffle your portfolio?
The need to reshuffle your portfolio arises from a variety of reasons. It includes changes in the macro situation, changes in your own financial risk matrix and shifts in the behaviour of asset classes. Here are 3 reasons for you to reshuffle your portfolio in 2020.
  • There is likely to be a global revival in growth with the new trade deal and BREXIT in operation. These could have positive cues for commodities and the capital cycle.
  • With rates close to historic lows, the ability to leverage debt prices will be limited. Equity as an asset class may still offer the best choice in the coming year.
  • As the slowdown starts to hurt, your own financial priorities may have changed in 2019. It is time to implement these changes to your portfolio mix in 2020.
When to reshuffle your portfolio?
There is nothing like the right time to reshuffle your portfolio. The portfolio needs to be reshuffled whenever there is an appropriate trigger. But, it is always better to make such actions a discipline. That means, you must ensure that every January you review your portfolio against your original goals and your current financial situation. Every portfolio review may not culminate in a portfolio reshuffle, but that is OK. The more important takeaway is to force you into the discipline of portfolio review on a regular basis and then make portfolio reshuffle a conditional outcome.

How to reshuffle your portfolio?
Clearly, year 2020 could show you the limitations of debt as an asset earning class after the sharp cut in rates in the current year. Also, the impact on equities of the lag effect of rate cuts could be more positive in 2020.  Here is how you can look to reshuffle your portfolio.
  • Given the debt allocation suggested by your financial plan, restrict debt exposure to the lower end of the range. Also, medium duration would be a better choice and you must allocate a small portion to corporate debt for higher yields.
  • Retain gold allocation at close to the 13-15% of overall portfolio. With global uncertainty likely to be elevated, gold could have a good year. Shift more of your gold holdings to dematerialized gold forms.
  • Equity could enjoy transmission effects of gold but the smarter way would be to use passive funds to play the equity theme. Specific outperformers will still be hard to find. Use index ETFs to better diversify your equity exposure.
What to reshuffle in your portfolio?
The reason reshuffling is going to be important in 2020 is that it is not just about the portfolio but also a reshuffling of your target returns on investment and your goals. What is this reshuffling we are talking about? You need to rework goals based on your target returns and inflation assumptions. The Indian economy has shown signs of stagflation with growth weakening and inflation rising. Weaker growth means lower rates and lower yields on investments. On the other hand, higher inflation means the future value of goals will be more expensive. That brings us to the second point about reshuffling of your goals and return expectations.

This has two important implications. Higher inflation means higher future value of goals meaning you need to invest more. Also, lower returns mean that you again need to invest more to earn the same level of expected return. In short, you either must take on higher risk (which is dangerous), or you must save and invest more each month (which is tough), or you must reduce your financial goal size (which hurts your dreams). The biggest takeaway on reshuffling in 2020 is that you need to adopt a more pragmatic approach. When the going gets tough, you need to adapt; and that is what 2020 could be all about.

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