How To: Evaluating Your Portfolio
Market conditions change, investors own requirements change, change is the only constant. Then why should your portfolio remain the same? The other truism of investment is that if you want to manage your portfolio, then you need to be able to measure all dimensions of risk and return. Finally, evaluation of a portfolio is necessary as wealth managers keep recommending products & investments without a full appreciation of their client’s existing portfolio. The evaluation of what the addition of the new investment or product does to your portfolio’s risk and return metrics will protect you against poor advice.
So you agree that portfolios should be regularly evaluated to check if it is fit for purpose? By fit for purpose, we mean that your portfolio can deliver what you want from it. Herein lies a problem. The lack of suitable information and the absence of the specialized knowledge necessary to conduct portfolio reviews prevents almost all individual investors from conducting any review.
We at Qfinr have made the process of evaluation as easy as a matter of a few clicks. By using industry-standard data sets and calculations with our unique and intuitive visualization, evaluating a portfolio or a wealth manager’s recommendations cannot become simpler.
While we don’t give specific investment advice, we can walk you through the process of how Qfinr can be used to evaluate your investments. Our goal is to equip you with tools so you can evaluate your own portfolios. After all, you know your objectives, risk tolerance, constraints, and aspirations best.
Let’s take the case of Ram, a hypothetical investor. Ram is 45 years old and has a portfolio for his retirement. Given his stage in life he has a moderately aggressive risk profile. His portfolio of about Rs. 1 crore looks like:
Ram had accumulated the stocks which he felt would appreciate. There was no method behind the investment, just stock tips from trusted friends. The blue-chip funds reflect Ram’s conservative bias. He felt that debt funds in India were not very good for his portfolio (again, not a result of any analysis) and by having exposure to blue-chip names he had expected to make about 15% per annum. He had heard of the saying ‘time in the market is better than timing the market’ and so the bluechip funds were something that he felt would meet his expected return with minimal risk. A good friend had told him that Mirae Emerging Bluechip invested in future bluechip names – and it seemed logical to have a small exposure to the fund. Finally, Parag Parikh Long Term Equity was a fund recommended by one of his wealth managers. Ram liked the idea of diversification outside India and therefore bought the fund without too much thought.
Ram was surprised and troubled that during April 2020 his portfolio fell by over 35%. He had thought his portfolio was a relatively safe portfolio and the prospect of losing a third of his corpus was troubling.
What would we do if we were Ram?
Step 1: Upload portfolio to Qfinr
One can choose to either enter your portfolio into Qfinr or upload the portfolio via our easy-to-use excel uploader. Ram, our hypothetical investor, entered his portfolio using the easy-to-use screen on his mobile phone.
Step 2: Evaluate the Portfolio Allocation
The allocation is the most important driver of returns. The allocation in portfolios made up of stocks and mutual funds is often not trivial as one has to look through the fund investments to get the individual holdings of the funds and then aggregate the information back. Qfinr summary of Ram’s allocation comes up in a couple of clicks using the Analyze Module. The portfolio’s top 10 holdings, its breakdown by sector, asset type, country and currency are displayed.
This serves as the starting point for an evaluation. Is this what Ram was expecting when he set out to build the portfolio?
Step 2: Evaluate the Portfolio Suitability
Portfolio characteristics should match the individual risk appetite and tolerance. Risk tolerances change – and so should portfolios. Using historical data, one can calculate the risk characteristics of a portfolio. These should be compared to the risk characteristics that the investor is comfortable with. Ram was taken aback on the amount of risk inherent in his portfolio. Qfinr’s suitability showed Ram the historical risk characteristics of the portfolio against a desired range depending on Ram’s risk profile.
Even though Ram’s portfolio was delivering higher returns, the inherent risk was significantly higher. Ram now had to consider options to reduce risk without compromising too much of the returns.
Step 3: Evaluate the Portfolio against broad market ETFs
Market ETFs are low-cost instruments to gain exposure to market returns. But these returns come with risks, and one needs to evaluate the ETF risk-return against the portfolio as well as the desired range for the individual. Qfinr’s Performance Comparison makes this easy by showing the characteristics of all 3 on an intuitive chart. Ram’s portfolio performs better than a NIFTY 50 ETF as it has higher returns for approximately the same risk as the ETF.
Step 4: Stress-Test the Portfolio
One important process used in most institutional money managers is stress testing. This is nothing other than running a what-if and evaluating whether one is comfortable with the outcomes. Qfinr’s Stress Test allows users to look at how their portfolio would perform during pre-defined periods of market stress, assuming the current holdings and the holdings being in existence during the period of stress. In Ram’s case, the analysis indicates that his portfolio had a maximum loss of over 35% during covid and more than 50% during the Global Financial Crisis. Ram needs to decide whether he is comfortable to chase after higher expected returns with the risk that accompanies those returns. While history is not a guide to the future, one should look at history to evaluate the implications of decisions.
Step 5: Review the Individual Holdings in the Portfolio
Every holding in the portfolio should be there for a reason. With the tools available on Qfinr, one can explore individual holdings (stocks, mutual funds, ETFs) to better understand the drivers of the returns and risks of these securities. This information helps individuals like Ram have more meaningful conversations with their wealth managers and thereby build better portfolios.
But Isn’t This a Ton of Work?
Yes – but then like everything else, nothing comes easy. Many investors already have wealth managers (the relationship managers) who are supposed to help in this. However, as we all know, the portfolio reviews do not happen regularly. With Qfinr evaluating portfolios is no longer tedious. All that is required for most investors is to sit with the Qfinr app for as long as they’d take to drink a cup of coffee or tea and let the app do all the grunt work while you focus on the important things : making decisions.
Evaluating your portfolio – easy, simple, and convenient.
Qfinr powering intelligent investment decisions.
PS: For those who prefer seeing numbers rather than charts, Qfinr has you covered as well. The app has a plethora of statistics and institutional-grade ratios to allow you to make a more informed decision.