Retirement Planning – Managing Your Investments (II)

Last week we covered the first two aspects of ‘managing your investments’. Today we will take up the third, in ‘Investments Review and Management’.

Investments Review and Management: This is the stage during which you will regularly review how your assets and the overall portfolio are doing. This involves the following:

• Set time aside during which you will review the performance of each asset and the portfolio. The period between reviews and the frequency thereof will depend on the assets, as each asset will have a different gestation period and lifecycle. For instance, real estate will normally take years to grow substantially in value while you know precisely what you are expecting from your T-Bills investment every quarter. Note, however, that real estate may require periodic physical visitation while your T-Bill investment would not! As a guide, the frequency of reviews for the asset that needs the most should be adopted for the whole portfolio. Without prejudice to that, a monthly review is generally apt.
• Asses each asset based on at least two dimensions. First, in terms of how well they are doing vis-à-vis the targets you set in the previous stages or as reviewed later. These targets and objectives could be liquidity expectations, Return on Investment (RoI), capital appreciation, wealth protection, etc. Consequently, each asset within the portfolio could be reviewed and assessed differently even at the same review session. The second criterion is as regards the asset’s overall contribution to the portfolio. For instance, if you expect your investment in T-Bills to provide certain interest income (and therefore cash inflow) then you should assess it along those dimensions and not in comparison to the capital gains in your real estate investments. A third dimension, which is physical assessment, might be required for some assets, like the real estate mentioned.

In building your portfolio and reviewing the performance of each asset, you should not expect that all your assets will always earn superlative returns. Instead, your focus should be on each asset to provide acceptable returns vis-à-vis its inherent risks and environmental realities and to contribute to the structural strength of the portfolio. Consequently, experts advise that we allocate desired percentages of our portfolio to different assets. For example, real estate might be 40%, Gold and Silver 5%, Commodities 12.5%, T-Bills 10%, Corporate Bonds 10%, Stock 20%, and Cash 2.5%, or any such proportion that meets our objectives and strategy.

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As long as you are happy with the structure and performance of your portfolio, you will need to monitor the composition through periodic ‘rebalancing’. If, for instance, your real estate shoots up from 40% to 55% of your portfolio due to capital appreciation, you can rebalance by divesting a part of it and increasing your investment in other assets that are also doing well but whose contributions would have fallen below their allocated level.

• Long-term investment strategy may change! Whilst we should have a steady long-term investment strategy, it can and does happen that we may need to alter it due to emerging developments and opportunities. In changing our strategy, however, we should remain true and alive to the fundamental objectives that we wish to achieve, our risk-return propensities, personal realities and environmental and operational factors.
• Grow, hold or sell: Based on your assessments, you will classify how ‘well’ or not each asset is performing and then decide what to do about it. Generally speaking, we could hold on to an investment, fully or partially, if it is doing well or we believe, due to certain factors, it will do well within an acceptable future timeframe. We could liquidate an investment, fully or partially, if it is not doing well and we don’t see any good chances of improvement over an acceptable time frame. In making any of these cold (ok, dispassionate) decisions, we should remain focussed on relevant issues and not be carried away by the sentiments of the investing public

I tell anyone who cares to listen that without necessary, corrective interventions, there are more statistical possibilities of things going wrong than right in most endeavours of day-to-day life. This requires that we have to be alert about every important thing we are doing, including making investments. As I also would say, it is never about getting everything right all the time. That is hardly possible. Warren Buffet, Elon Musk, Aliko Dangote and Tony Elumelu get things wrong from time to time. The focus should be on doing the best in any situation and striving to ensure that the incidences and quantum of the gains surpass those of the losses from wrong calls. A few ways to ensure that are:

• Always be aware of economic and industry developments while keeping your mind open to competing investment alternatives. According to the results of research by James Banks, Cormac O ’Dea and Zoë Oldfield in 2010, pre-retirees with low financial skills have been found to have a flat wealth trajectory than those with high financial skills.
• Engage with experienced and successful investors and professionals. Yet, all final decisions are your responsibility and should never be abdicated or transferred
• Diversify your portfolio to meet your requirements
• Manag Risk/Return dynamics and rebalance your portfolio from time to time
• Be aware that you need cash for certain purposes.

Next week, we will take up Legacy and Estate Management.