Question

First, I want you to think about your retirement portfolio, and make a contribution to discussion based on the following questions:

• Is it easy or difficult to estimate the risk of your overall portfolio? Have you calculated the standard deviation of your investment portfolio?
• Without giving details of your exact allocation, do you own now more stocks than bonds? How frequent do you adjust (rebalance) your portfolio? If you were going to make some changes now, do you think you need to increase your allocation to bonds? Stocks? Riskier securities or safer ones?
• Do you buy directly stocks or you invest in mutual funds? Index or active mutual funds? An index fund is a fund whose return depends on an index (i.e. S&P 500). An active fund's allocation is decided by a manager that decides what to buy or sale.

Answer 1

Estimating the risk of overall portfolio:

It's not tough at all to measure the risk of a portfolio.

It simply involves calculating the risk of all the individual investments that form part of the portfolio, and then allocating weights to the individual results based on the relevant weight an investment carries in the overall portfolio. The latter results are then simply added up to arrive at total risk of the portfolio.

Yes, I have calculated standard deviation of my portfolio and it can be arrived at using the approach detailed above.

Stocks vs bonds

Since it's a long term retirement fund, I have invested a significant majority of my portfolio in stocks and a minority in bonds. This is because, in longer term historically, stocks have almost always outperformed bonds with a huge margin and have proven to be a very reliable long-term method of earning capital gains, against bonds which have historically been more or less just hedges against inflation.

Rebalancing portfolio:

While I keep an open mind about the various industries that are going to give stable long-term returns and therefore, always looking to restructure the composition of stocks and sectors I have invested in, but in terms of stocks vs bonds, I don't change the weights of the said asset classes in the portfolio because it's a long term portfolio and short term factors wouldn't make a difference to the long term performance. Therefore, I stick to the ratio that I want to maintain between stocks(significant majority) and bonds(minority)

If I were to make any changes, I would increase the weightage of stocks further, simply because it is far better long term investment than any other asset class and deserves a high weightage in any long term portfolio. In terms of securities, I would choose safe large cap securities that offer good dividend yield.

Stocks vs mutual funds

I like to invest both in stocks and mutual funds. I majorly invest in S&P 500 index mutual funds as they replicate the performance of the America's largest and safest companies bundled together without attracting hefty fund management fee of an active fund. Along with that I invest directly in stocks for the purpose of incorporating a small weightage of selective mid caps I want to have in the portfolio.