You are a young 35 year old couple and are saving for multiple goals – being debt free, buying a bigger house, children’s education, being a reserve in case either parents run out of money, …etc. You sit down as a couple and are reviewing your portfolio, what do you exactly do? Lemme guess

• you see how your portfolio is doing
• you even compare it to a big broad index
• you even go to a couple of websites like Morningstar and see whether your fund is rated well
• If you have an equity portfolio you are very happy that ALL your shares have gone up

Right? Well most people do this.

What have you missed out?

You have missed out the risks in your portfolio. If all your funds and all your equities have gone up at the same time, remember at some point in time, they could all be in the red! You need to ask yourself – are you using some risky strategies? All your shares or funds moving in the same direction is a potential sign you have not paid enough attention to diversification.

Diversification is not just about having more than one share – in fact having one well diversified fund is enough when your sip amounts are small. Diversification is about having many shares, across multiple sectors, management groups, geographies, countries, currencies, industries, etc.  In such a scenario if your full portfolio rises simultaneously, this suggests they are all responding to the same key factors and drivers. That is RISKY INVESTMENT STRATEGY. A well diversified portfolio will spread out investments across categories that respond differently to different factors and drivers. For example if you owned Ongc, Selan, Hoel, Hpcl, and Indigo – see how each one will react to oil price hike (or fall).

Many investors think owning more than one share is diversification. This is only partially true. Owning Hpcl and Bpcl is hardly any diversification. Owning EID PARRY gives you a flavor of fertilisers because it is the holding company for Coromandel International, etc etc. Owning 2 companies in the same industry diversifies only one type of uncertainty: company-specific risk. So if you held Satyam, Infosys, and Wipro, you were saved from the risk of owning only Satyam! While it could help protect you from the risk of having all your money concentrated in a Satyam -like house of cards, it won’t protect you from higher-level concerns and considerations.

How much do you withdraw annually, and could you cut it if you had to?

You can calculate your annual withdrawal rate (or for your parents) by using your online-access tools. It usually is not too difficult to learn! Your parents may feel overwhelmed with all this, so help them through it.  Total the past year’s withdrawals, and then divide that sum by the value of your portfolio at the beginning of the year. The resulting number is your withdrawal rate for the year. How much have they withdrawn? Is it high? Is it 13% or is it a nice 5% -or are they able to live just off the dividends? Well if it is 12% and the corpus is NOT HUGE (obviously) you have a major, acute and immediate problem in need of rectifying. NOW. Even if it is a more manageable level — 4%, 5%, 6% — you should consider the some of the worst-case scenario and assess how you would live if you had to slash this amount by a quarter or half. Write down your plan. Maybe your parents did not do it when they were 35, but no harm in preparing. Too young? ha time flies!