It is natural to be enthusiastic when you start something new. Your strength lies in persisting with the enthusiasm till you reach your goal. It’s no different with your retirement portfolio. Saving for retirement takes effort.

Consistently reviewing and managing the portfolio through its investment horizon requires persistence. You have to strike a balance — review your portfolio periodically, but not so frequently as to lose the enthusiasm to manage your retirement account.

Here’s why periodical review of retirement portfolio is important and how often you should review your account.

Why review? As most others do, suppose you invest only in stocks and bonds in your retirement account. Your bond investments should be primarily in tax-free bonds and bank fixed deposits, besides provident funds.

Fixed deposits and tax-free bonds have fixed cash flows — the interest you will receive every year and the redemption value on maturity. So, you don’t have to review your bond investment periodically, except to check if the interest has been credited to your account.

This leaves you with equity. Reviewing your equity investment is important. To achieve your retirement life goals, your savings during your working life should continually earn certain rate of return to accumulate the wealth you require at retirement.

This required rate of return is called minimum acceptable return (MAR). Your chance of achieving your retirement life goal reduces if your portfolio generates lower return than MAR in any year.

Suppose your MAR is 11 per cent on an investment of ₹50 lakh. If your portfolio achieves 9 per cent in any year, it falls short by ₹1 lakh. Over your working life, this shortfall can magnify, leading to an investment value gap. So, reviewing your equity investment and taking action is important to achieving your life goals. But how often should you review your investments?

The trade-off If you review your portfolio very often — once a month or quarter — you may be tempted to take decisions based on short-term fluctuations in equity prices.

This does not necessarily mean infrequent reviews are better. While such reviews may help you distance yourself from short-term price volatility, you may be become oblivious to shortfall in portfolio returns. So, how should you create your portfolio review process?

The periodicity of portfolio review is a function of how many years there is left in the investment horizon.

You should review your portfolio once a year till you reach age 45. Thereafter, you can choose to review your portfolio once every five years till you retire at, say, 60.

Your review process should synchronise with your rebalancing strategy; typically, you should reduce your equity investment every five years starting at 45 and reduce its proportion in the portfolio to 25 per cent by 60.

Why review every year during the initial years? A significant proportion of wealth accumulated in your portfolio at retirement comes from returns and not from capital contribution, especially if you start young.

Besides, you should not risk more-than-required capital. So, if your portfolio in any year generates 15 per cent and your MAR is 11 per cent, you should move the excess 4 percentage points profit to bonds. You have to review your equity investments on an annual basis for these actions.

It is important that you do not spend much of your leisure time reviewing your portfolio. So here is a simple rule to keep your review process to a minimum.

During years when the stock market climbs, check the total portfolio return and transfer excess returns over MAR to bonds.

When the stock market declines, increase your equity investments and give some time for your portfolio to heal.

(The writer is the founder of Navera Consulting. Send your queries to >portfolioideas@thehindu.co.in )

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