Factors That Can Derail Your Portfolio

Hemant Rustagi
Chief Executive Officer, Wiseinvest Pvt Ltd.

To be a successful investor, you must demonstrate patience, perseverance and commitment through your defined time horizon. That’s because you will have to face a number of challenges from the time you start investing and when you achieve your investment goal. The level of investment success you can achieve will depend upon consistency in your investment process and decision-making during these challenging times. Here are some of the factors that can derail your investment portfolio, if not tackled well.

1) Lack of diversification and | or over-diversification — While diversification is the key to curb volatility in the portfolio, lack of diversification and | or overdiversification in the portfolio can expose you to higher risk. While a concentrated portfolio has the potential to generate higher returns, the losses could be higher too. Therefore, if it’s a conscious decision to either build a concentrated portfolio or invest in a focused fund, short-term losses should be ignored. Similarly, overdiversification in the portfolio allows non-performing investment options to remain in the portfolio and that can make a dent in your portfolio return. Therefore, it is important to avoid over-diversification and monitor the progress of the portfolio regularly to weed out nonperformers from the portfolio.

2) Too much aggression in portfolio selection — Investing in aggressive categories like sector and thematic funds can result in much higher volatility in the portfolio. While it is true that aggressive funds have the potential to deliver higher returns during certain market phases, there is no guarantee that it will happen. In fact, if the timing is not right, the volatility can be detrimental to your investment process. 

3) Relying on short-term performance — Relying on short-term performance for fund selection can either make your portfolio very aggressive or very conservative based on what’s working out at that point of time. While higher allocation to equity based on short-term performance in a rising market can take you beyond your risk-taking capacity, a conservative portfolio can bring your real rate of return down. The right way to build a portfolio is to follow asset allocation and invest in funds that have long-term consistent performance track record.

4) Thinking that booking loss is a bad thing — If it is proved that there are non-performing funds in the portfolio after giving them sufficient time to perform, don’t hesitate to make changes. Remember, booking losses is not a bad thing as long as it allows you to reinvest in better performing funds.

5) Disregarding your time commitment — Remaining committed to your time horizon can help you manage losses. Over time, equity portfolio can deliver positive real rate of return. Therefore, once a time horizon is decided, stay committed to it to benefit from the true potential of equities and enhance the chances of achieving your long-term goals.

6) Ignoring opportunity losses — Opportunity loss is the value or potential gains that you miss out by choosing a specific type of asset class, investment option or strategy. Remember, frequent instances of opportunity losses can make a significant impact on what you get to accumulate over time. Therefore, monitor your portfolio regularly and be aware of opportunities that can help you improve your portfolio returns. Of course, making frequent changes can become counter-productive. 

7) Strategy to invest conservatively to avoid losses can backfire — There can be a temptation to invest in less risky investments like bonds, FDs, small saving schemes to avoid losses in the portfolio. However, ignoring the risk of inflation and staying away from market-linked products can result in a heavy loss in terms of negative real return. Therefore, including equity and equityrelated funds should be a priority for long-term investments.