Portfolio Maintenance

26 Aug 2013
by Arjun Parthasarathy

Portfolio maintenance is an on going process. Once you have spent time and effort in constructing an investment portfolio that is right for you, you would have to justify your efforts by maintaining your portfolio regularly.

Portfolio maintenance does not mean that you have to change your portfolio continuously or you have to book profits or cut losses periodically. Portfolio maintenance is an activity where you keep measuring the current weights of  stocks and sectors in your portfolio and also measuring the overall portfolio dynamics.

Let us illustrate portfolio maintenance with an example. You have constructed a portfolio of ten stocks with each stock having a 10% weight in the portfolio. The weights of the stocks in your portfolio were based on a market price as of 26th August  2013. The portfolio is a long term portfolio and you have done enough homework to be confident of the portfolio performing in the future.

However, portfolios are not static. Stock prices move dynamically and three months down the line, the prices of the stocks in your portfolio would have changed. When you evaluate your portfolio three months down the line, you will notice that due to change in stock prices, the weights of the each stock in your portfolio would have changed. For example stock A with original weight of 10% in the portfolio would have a weight of 15% in the portfolio due to stock price appreciation, while stock B with a 10% original weight would have a weight of 5% in the portfolio due to stock price fall.

Why is the change of weights of stocks in your portfolio relevant to you? You may have a long term outlook on the portfolio and may not really worry about short term increase or decrease of stock weights in the portfolio. However, the rise or fall in stock weight in your portfolio may require you to rebalance the portfolio or will help you in allocating fresh funds to stocks in the portfolio.

In the example of the ten stock portfolio, you may want to keep stock weights steady in the portfolio and hence you would have to sell 5% of stock A and add 5% of Stock B in the portfolio to bring both the weights back to 10%. Rebalancing of the portfolio also helps you take profits and average out purchase price. One caveat here is that you must be confident of Stock B as a price fall may mean many factors at work that may actually be going against your original analysis.

The changes in stock weights help you in allocating fresh funds into your portfolio. You will add weights to Stock B that has a 5% weight in the portfolio and by this you will also be recalibrating weight of Stock A that has a 15% weight. Portfolio maintenance helps you to put fresh money in stocks that have fallen in price as you recalibrate weights in the portfolio.

What should be the frequency of portfolio maintenance? You can do a maintenance check every quarter or half year or even every year. Maintenance checks can be carried out when markets have been extremely volatile or when you have fresh funds to invest. However the first maintenance check is always at the time when you have finished constructing your portfolio. You will have to double check whether you have done your homework on the portfolio as that will be the basis of your future maintenance action on the portfolio.

About the Author

Arjun Parthasarathy is dedicating his experience of over twenty years in financial markets to guide investors to the path of informed decision making on their investments. The more informed the investor, the more money the investor will make is the guiding principle of Arjun. The fact that he has worked across markets including equities, interest rates, credits and currencies and across market platforms of fund management, proprietary trading and research, gives Arjun the extra edge that is required to guide investors to make the right investments in the globalized nature of markets.