On Making Adjustments To An Overweight Investment Portfolio

It is important to review your portfolio regularly. You don’t need to make changes always but you always want to make sure that you’re still following your investment strategy

When building your investment portfolio, diversification is the first rule. You are expected to have a cocktail of securities covering a diverse range of industries as a means of curbing your risk exposure.

However, as time progresses, the balance of your finely-crafted portfolio starts to shift. Some industries start to do so well compared to the others that they become overweight. Your investment portfolio is said to be overweight when there is an excess amount of an asset or a focus on one industry in the investment portfolio thereby causing an imbalance from your original allocation.

When it loses balance like this, it is only right that you seek out ways to correct it so you are not overexposed. Correcting it typically means that you buy more of an asset (or stocks in an industry) or sell off some of the stocks performing well.

However, just as it is not advisable to pull out your funds haphazardly from the stock market because of something you heard in the news, you also don’t want to start selling off stocks because of the overweight.

Factors To Take Into Consideration

The Tradeoff

Adjusting an overweight portfolio might require you to reduce some of your best performing stocks. When you think about this, it almost doesn’t even sound like a logical thing to do. However, if the tables turned and the stocks begin to perform badly, you would be thankful if you have reduced the weight.

The Trends

Before considering whether you should make an adjustment in your portfolio or not, it is important to assess the trends. How do the over-performing stocks compare with other securities in the same industry or its peers in general?

Based on the trends, were you just lucky to have bought the shares at a low? Is this the true growth pace of the stock? Will the industry or stock(s) continue to outperform over the next year or will it be further out-performed by another industry?

Are there management issues causing this change that are not sustainable? On the flip side, is the increase an anomaly that would eventually readjust? Is the industry over-performing or are other industries in your portfolio just underperforming?

You need to understand the specifics of the industry before making a decision. For example, if you find out that the industry is having a boom after a bad year, you can sell off part of the shares you have to re-balance your portfolio and also snag a few profits in the process.

If the high trend becomes the norm, then you would have more to gain from it overtime. There are also times you don’t need to hold on. Reducing the weight of some stocks would lead to an imbalance when things return to normal.

It is important to review your portfolio regularly. You don’t need to make changes always but you always want to make sure that you’re still following your investment strategy. This review is what will help you to decide if you should rebalance your portfolio or hold on.

Written by Lawretta Egba