More often than not, I have received calls from investors asking me to add a new investment to their existing portfolio based on discussions that they may have had with their friends and family or based on recommendations from media or social media influencers.
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As advisors, we build portfolios for each investor, based on their risk profile, financial goals, and time horizon and after considering their cash flows as well as net worth. However, when a new investment is to be made, we need to revisit the changes in the investor’s cash flow as well as worth and also evaluate the existing portfolio before going ahead with the same.
A review of the existing portfolio is very much required due to the following reasons :
Ensuring no overlap of asset allocation:
Your existing portfolio may have investments that could possibly overlap with the new investment, thus making the portfolio highly concentrated towards a particular sector. This skewed investment would probably increase the risk in the portfolio that is neither anticipated nor planned, thus affecting your financial goals as well as the returns in the portfolio. This review helps in the optimal asset allocation mix as per your financial goals and time horizon.
Accommodating changes in personal circumstances
Your existing portfolio has been made considering your circumstances as well as goals, you may want to add the new investment if your circumstances have changed or there is a change in your standard of living etc. Evaluating this portfolio will not only help you evaluate whether your existing investments align with your goals but also if the new investment will help achieve such goals or accommodate the changes in your personal circumstances.
Understanding the cyclical nature of each investment
Your portfolio may not have the optimal returns as expected but that is due to the cyclical nature of the investments in your portfolio. The new investment may not align with the existing portfolio even though it may have optimal returns in the current markets because it is quite possible that such investments have run up to their peak in recent times and may not have the potential anymore to perform.
Understanding the tax implications of the rebalancing of the existing portfolio
You need to consider the tax implications of any new investment that you are about to make, as there may be hidden taxes in such investments which would probably hit you later. Also if you are rebalancing your existing portfolio to accommodate the new investment, it becomes extremely important to evaluate the tax implication of the rebalancing too as you may end up paying taxes on your capital gains.
Understanding the risk factors in the existing portfolio vis a vis the new investment
Your portfolio has been prepared by taking into account all the risks involved, for example, market risk, interest rate risk, inflation risk as well as volatility risk. It hence becomes imperative to evaluate your existing portfolio such that the risks are still taken care of and that the new investment takes care of such risks as well which otherwise could have an adverse effect on the potential returns of the portfolio.
So in conclusion, while making any new investment, it is important to analyse and consider your risk tolerance, time horizon and the alignment of the same with your financial goals. You can achieve financial success by properly diversification of your investments and aligning such investments with your time horizon, risk tolerance and financial goals as well as your cash flows and net worth.
However, if this all sounds overwhelming, a good financial advisor can help you make informed decisions on your existing portfolio as well as make a new investment. It is akin to taking an opinion from a good doctor when it comes to evaluating your illness, so why shy away from taking good advice when it comes to your finances?
