A well-diversified portfolio is the proverbial silver bullet for the consistent long-term growth of your investments. It protects your portfolio from the risks of large declines and structural changes in the economy over time. Monitor the diversification of your portfolio, making adjustments when necessary, and you will greatly increase your chances of long-term financial success.
Just to give an example from India - Investors who primarily had real estate in their portfolio saw large gains between 1995 and 2008 but have seen negative since 2012. Similarly, people who were overweight on equity between 95 and 2004 and invested in NIFTY would have seen less than 9% CAGR returns but NIFTY doubled in the next 2 years and then took another 8 years to double by 2014. So history suggests that hedging by building diversification helps to get an optimal return with lower volatility.
However, while diversification across the asset classes is important it is equally important to rebalance your portfolio to bring it back to the original mix whenever there is a sharp increase in valuation of one of the asset class. For e.g. if you started in 2014 and allocated 50 percent each to real estate and equity then your portfolio would now be 58% equity and 42% real estate as real estate has been flat and equity has grown by 30%. Rebalancing your portfolio would mean reducing your equity exposure by around 15% and increasing real estate by 18%. This is a simplified version to help you understand the point.
My portfolio right now is 20% real estate (This is beside the house where I live. Self-occupied house is not an asset for me)
10% money market mutual fund
20% debt fund
50% through a mix of large-cap funds and investments in a few stocks that I consider multi-baggers from small/mid caps.
As a best practice, I probably need to rebalance my portfolio as this was my portfolio weightage at the beginning of the year and equity market has been quite turbulent this year. I can probably get rid of some of my large cap MF holdings and invest in real estate as valuations are attractive there.
We are getting a lot of requests from SaveAbhi users on portfolio analysis so we have decided to launch a special package for analysing portfolio at INR 250 only. This option is available under “Consult an Expert” tab on the SaveAbhi mobile app.
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