So after months of careful study, you have put together the perfect portfolio for your discretionary account. Let’s say you have decided on 40% in fixed income products, 40% in stocks, 5% in cash and 5% in alternative assets. You allocate GH¢1,000.00 among these investments and commit to making subsequent deposits in that proportion.

Three months later you have another GH¢1,000.00 that you plan to share in your 40-40-5-5 ratio but then you realize that alternative assets such as Gold is up 14% and Bitcoin is up 220%. Also fixed income products are yielding 18%. Meanwhile, stocks are down 10% for the period. You are very tempted to change your allocation to include more alts and fixed income and make zero allocation to stocks for the period. Should you do it or should you stick to your original allocation?

In answering this question, I must first of all state that absolutely nobody knows for certain what is going to happen in the future. We are all making guesses about what could happen based on our study of the past and inferences from the present. Therefore, it would be ridiculous to say immediately that one should forgo a guaranteed yield of 18% (on the fixed income) in order to maintain an arbitrary asset mix in a portfolio.

Now that the obvious is out of the way, we need to discuss the importance of keeping discipline in a portfolio. When you create a portfolio, you are making a judgement that the portfolio as a whole presents a way to acquire the maximum return at minimum risk. The individual assets in the portfolio are picked in a way that they do not have a too high correlation with each other i.e. they do not all rise or fall in at the same time. It could well be that the equities would rise when fixed income starts to underperform and then you will be left with a smaller allocation to equities than you would have wanted, and a larger allocation to fixed income than you want.

In a more practical case, assume you had invested that GH¢1,000.00 in a fund with that 40-40-5-5 allocation. Would you pull your money out from that fund if they ended the year with a positive risk-adjusted return simply because one of the classes which they allocated to underperformed? I do not think so. The return of the portfolio is what is paramount, not necessarily the individual returns of the assets within the portfolio. So if the portfolio as a whole is doing well, why would you change the mix simply because one particular asset is underperforming?

One does not need to necessarily see their investments as a portfolio. You are free to chase the hottest asset at each point in time but if you want to build a long-term stable portfolio, then you are going to have to wait to see how it performs for years before making a change.