When Your Investment Portfolio Is Overweight

To determine if your portfolio is overweight, you need to assess the performance of all the available stocks and see the pattern they have taken over the years.

A thing that is overweight is considered to be over the size it should be. It could be a person, an animal, and in some cases, your investment portfolio. If you haven’t heard this term before, don’t let it surprise you – it’s really quite straightforward.

Let’s assume Kojo has just won the lottery and he decides to first take care of himself. If he focusses on eating junks primarily, it is only a matter of time before he becomes overweight – even if what he’s eating make up some of the tastiest things on the planet.

The same goes for your investment portfolio. It’s okay to want to invest well now that you’ve got the money to do so, but if you focus on only one industry because it is one of the best ones out there, it is only a matter of time before there’s an imbalance and your portfolio is overweight on one side.

Much like overeating, excess weight sneaks up on you when you least expect it and it might be too late to do something about it.

Your investment portfolio is said to be overweight when there is an excess amount of an asset in the investment portfolio. For example, if the required percentage an industry is supposed to have in your portfolio is 10% and it somehow becomes 20%, your portfolio is overweight by the difference of 10%.

Another context in which overweight is used in the stock market is when a stock is expected to perform better than others. That stock is said to be overweight.

When building up a portfolio, one of the greatest rules to mitigate risk is to diversify. You are expected to have different kinds of assets in your basket spanning across different industries and ultimately progressing in different ways.

While a bad portfolio can be overweight from the beginning, a properly crafted portfolio can also become overweight as time passes. In a hypothetical period of 10 years, your investment portfolio would look nothing like it was when you started.

This is because its makeup would change as various industries and stocks perform better or worse than the market. An industry will become the leader making major gains and another will crawl. As such, your well-planned portfolio allocation now becomes one that is heavy on the specific assets that have done better than the others.

While it might seem like a good idea that some stocks are actually doing much better than you expected, you are setting yourself up for a downfall because the moment anything at all happens to that asset, your entire basket would crash.

To prevent this from happening, you need to constantly evaluate the balance of your portfolio. As time passes, you will need to re-examine the allocation of your portfolio allocation.

To determine if your portfolio is overweight, you need to assess the performance of all the available stocks and see the pattern they have taken over the years. They would probably look nothing like what you started with.

You can also assess the risk that every industry or type of security brings to the portfolio. If one sector is more than the others, you will need to adjust it.

To make adjustments, you need to put your portfolio on a diet and cut off the excess stuff. For this, you can either reduce the weight by selling off some of the heavy assets, buying some of the underperforming assets, or crafting a new portfolio structure altogether.

However, much like every other part of the investing business, nothing should happen for just happening sakes. You need to know the best decision to take and, most importantly, when to take it. That’s where the real work is.

Written by Lawretta Egba.