One of the most neglected aspect do-it-yourself investors is performing a realistic assessment of their portfolios. I have adopted a very disciplined approach to make sure I follow my quarterly regime of reviewing the progress. First step was to check out the status. Second step is to understand risk, and third step is to make changes (or execute or re-balance if necessary).

In earlier post, I presented the progress update of TIPBlog portfolio. The next step is to analyze risk in the context of my personal risk profile parameters. The objective of this risk analysis is to make sure that TIP portfolio is not exposed to any particular event, or company, or any other aspect that will affect portfolio performance.

My portfolio management process has a risk management process in which I try to:

1. Maintain pre-determined asset class allocation;
2. Maintain pre-determined diversification, any sector should not exceed 10%;
3. Any single stock should not exceed 7% of the portfolio; and
4. Dividends from a single stock should not exceed 5% of total dividend cash flow.

Maintaining Asset Allocation

Chart 1 shows different asset classes and my target allocations. These are target levels, which allow me to maintain certain level of sanity and do not get carried away by media hypes. I am open to adapting or modifying these targets, however, such modifications are rare. I am only demonstrating the target (and not the actual allocations because that is complete private).

TIPBlog Portfolio - Asset Allocation

Maintaining Diversification

For industry sectors, I have a pre-defined maximum limit of 15% for power sector, while all other industry sectors my maximum limits are 10%. The chart 2 shows that I have higher exposure (relative to my limit) and concentrated in Diversified, Finance, Power, Oil and Gas, and capital goods.

• My diversification in industry sector continues to be out of whack. The primary reason is I added to my existing position in early 2009.
• One would observe that these are the sectors that pay relatively consistent and higher dividends. Intuitively, this seems to be correct because, invariable in search of stable growing dividends, I end up in these sectors.

For individual stock’s value, I have a predefined range of 3% to 7% of the total equity portfolio. The chart 2 shows that I continue to be overexposed in five companies, while the remaining six companies are well within my targeted range.

Criteria of Maximum Dividend per Stock

The purpose here is to ensure that dividends from any given stock do not exceed 5% of the total dividend cash flow. This is to make sure that I am not over exposed to variability of dividends from companies. Once in a while, it is likely that company may reduce its dividends to common shareholders. In worst case, it may cut its dividends altogether. This criterion allows me to build-in that safety net for my cash flow. The chart 3 shows that I overexposed in certain stocks. I continue to be overexposed to L&T and ONGC.

The way forward…

My quarterly risk analysis shows that I continue to remain exposed. I remain outside my risk appetite. I have put TIPBlog equity portfolio at higher level of risk. In my earlier risk analysis post, I have discussed events/situation that lead to this un-balanced high risk scenario.

There are two ways to manage rebalancing:

1. Bring down the allocation by selling partial positions in ONGC and L&T. Going down this path essentially means re-balancing your portfolio.
2. Do not allocate future capital and hence, final allocation will automatically come down.

The current holding for TIPBlog portfolio is listed under My Portfolio page.

So which process should be used for rebalancing?

This is where an effective rebalancing process helps in making sure we do not make an emotional decision. Many investors use the concept of profit booking. My viewpoint of profit booking is that it is a short sighted view looking into present scenario alone. The notion of profit booking can be justified only for traders. However, long term investor (growing with the company) should not be using this strategy. Re-balancing should be based on concept of expected return on your capital. I will discuss this more in next post on rebalancing.