Monday, 6 April 2015

Sebi pitches for pension money in markets as Arun Jaitley takes stock

Please find below a news article as appeared in Economic Times for your reading:

Sebi pitches for pension money in markets as Arun Jaitley takes stock 

NEW DELHI: To deepen capital markets, Sebi today pitched for allowing investment of pension money into various securities instruments and to create an enabling environment for REITs to flourish, as Finance Minister Arun Jaitley reviewed the state of capital markets in the country. 

In his first post-Budget meeting with Sebi's board, Jaitley also discussed the capacity building and other infrastructure needs for merger of commodities regulator FMC with Sebi to create a unified markets unified markets regulator. 

Jaitley also discussed the recent trends related to investments by foreign portfolio investors and domestic institutional investors in the securities markets. 
After addressing the board members of the Securities and Exchange Board of India (Sebi), Jaitley said he also discussed various issues confronting the regulator, its functioning vis-a-vis new proposals in the Budget and the roadmap ahead. 
"They (Sebi) talked about capacity building at Sebi, both in terms of ability to acquaint with the subjects and other infrastructure requirements," the Finance Minister said about the discussions on FMC merger during his customary post-Budget address to Sebi board. 
Jaitley was accompanied by Minister of State for Finance Jayant Sinha during his interaction with Sebi's board and other senior officials of the markets regulator. 

Besides Sebi Chairman U K Sinha, its 8-member Board includes three Whole Time Members (Prashant Saran, Rajeev Agarwal and S Raman), an independent director and nominees of Finance Ministry, Corporate Affairs Ministry and RBI. 
Sebi later said in a statement that its Chairman apprised the Finance Minister of the recent developments in the Indian securities market and the initiatives taken by the regulator. 

"He also highlighted the announcements related to the securities market in the Union Budget for 2015-16 and consequent action being taken by Sebi," the regulator added. 
"Jaitley discussed the recent trends related to investments by foreign portfolio investors and domestic institutional investors in the securities market. Need for pension money to come to the Indian securities market was particularly emphasised. 

"Potential with respect to entry of REITs (Real Estate Investment Trusts) in the market was also discussed. The Finance Minister also took note of the roadmap of FMC's merger into Sebi," Sebi said. 

Role of an investment adviser

Role of an investment adviser

Mr Amit Trivedi, Founder of Karmayog Knowledge highlights the role of an investment adviser and explains how should an adviser manage clients expectations

Managing clients expectations – a key
What does a client expect from an investment adviser or a mutual fund distributor (We will keep using the term “investment adviser” or “adviser” to refer to investment advisers, financial planners as well as mutual fund distributors)? I have asked this question in many training programs to advisers. Some of their answers have set me thinking: Are they not setting very high, or in some cases, completely wrong expectations? If the expectations are not set correctly, the relationship would be under stress sooner or later. However, the first step in setting the expectation is for an adviser to understand his own role and beliefs.
Need based financial planning
Let us start with a basic question: “Why do investors need to invest?” For a question as simple as this, the answer is equally simple: “The investor has surplus today and would need the money to fund a goal in future. Investing the money for the intermediate period is a need.” Given this, it is important to ensure that the money is available at the time of the goal.
For this purpose, an investment portfolio is created. A portfolio, if properly constructed, would help the client to reach the financial goals.
 
In the typical value chain (Fig. 1), there are two intermediaries between the client and the portfolio. Both the intermediaries play important roles in this process. If both do their respective jobs well, the client has a very high probability of reaching the financial goals. However, one must understand the difference between the exact roles of the two intermediaries.
Role of an investment adviser & Portfolio Manager in financial planning:
•    As shown in the diagram, the portfolio manager is closer to the portfolio, or the investments. The investment adviser is closer to the client. Hence, in simple terms, the portfolio manager manages investments, whereas the investment adviser manages the investor. Further, the former must know Economics, the latter Psychology.
•    The portfolio manager analyses the merits of various investment options to construct a good portfolio. The attempt is to generate performance in line with the stated objectives of the scheme. It is the investment options and the selection done by the portfolio manager from time to time that helps generate returns. The job of the investment adviser is more of managing the risks in line with the client’s need to take risk and his risk appetite. For that purpose, the investment adviser is supposed to understand the risks the portfolio is exposed to. One must also remember what Benjamin Graham said, “The investor’s chief problem and his worst enemy is likely to be himself.” This is where the role of Psychology comes in. Most of the times, it is the decision taken under the influence of some strong emotions (most of the time, fear) that results into portfolio losses or opportunity losses. 
Bringing discipline in investment approach
The role of the adviser then becomes quite clear. The investment adviser helps the investor plan the investments and then ensures the investor stays with the plan without any deviation. 
However, whether to be a pure play investment adviser or also play the role of portfolio manager (either in full or in part) is a decision one has to take based on one’s strengths and beliefs. Someone may believe in the principles of asset allocation and decide to stay with strategic asset allocation. Someone may believe that the adviser has to only take strategic asset allocation decisions and then leave the active management to portfolio managers. Someone else may believe that tactically changing the asset allocation could help generate alpha. 
Whatever the belief, one can build the practice in line with the belief. One only requires building the ability to fulfil the promises. 
Having said that, it pays to keep few things in mind:
1.    The investment adviser must know how the fund manager manages the fund. What is the investment objective and what is the investment style?
a.     Assume the adviser is tactically shifting between the asset classes, viz. equity, bonds and cash. If the fund manager and the investment adviser have opposite views, the eventual result could be far from desired. For example, if the investment adviser is bullish and has recommended investment in an equity fund, which has taken a conservative stance and moved into cash, the investor still does not get a full equity portfolio.
b.    Similarly, when one believes that it is possible to take a call on interest rates, it is also important to decide whether the adviser tries it himself or leaves it to the fund manager.
c.    When the adviser believes in strategic allocation, it is important to use only those funds which allow for maintaining the desired allocation. Else, the allocation strategy should be flexible enough to accommodate the fund styles.
2.    Ensure that both the investment adviser and the fund manager are adding value to the whole process; else one must avoid duplication of charges to the customer.
It is important for an investment adviser to understand her role and clearly communicate the same to the client. This communication should become the core of the relationship with the client. Your ability to deliver on the expectations is critical to building trust with the clients.
About Author: Amit Trivedi runs Karmayog Knowledge Academy. 
Disclaimer: The views expressed are author’s personal views. He can be reached at amit@karmayog-knowledge.com

NAVIGATING VOLATILE MARKETS

NAVIGATING VOLATILE MARKETS

1. Why have the markets been so sporadic in recent times? 

Ans. Indian equities have witnessed some volatility since the start of the year, mainly driven by global cues. Nervousness around Greece along with the stronger than expected data in the US have raised expectations of an earlier-than-expected rate hike by the Fed. A rate hike will result in money flow into US dollar assets, which will likely impact global currency and equity markets. The euro has already touched a 12 year low vs. the US dollar. Domestically, Q3 FY2015 earnings were below estimates. We believe that investors should consider buying Indian equities at every dip. The Budget 2015-16 was pragmatic and growth oriented. Revival in the investment cycle, pro-cyclical measures by the new government, low inflation and further possible rate cuts by the RBI will help boost economic activity, which will eventually reflect in corporate earnings. We remain optimistic that corporate earnings will exhibit strong growth in FY16 and FY17. 

2. What advice should advisors give to new and existing customers for Equity investments from a short term perspective? 

Ans. Investors having an investment horizon of more than 1-2 years should use any market correction to buy Indian equities. With the government’s focus on reviving the investment cycle, we expect GDP growth to accelerate from here on, which should bode well for equities. Higher investments by the government would lead to job creation, which in turn would spur higher savings, consumption and investments, thereby creating a virtuous cycle. Short term investors should ideally stick to the systematic investment plan (SIP) route of investments as markets may continue to be volatile in the near term largely due to global factors. 

3. What are the local/global risks that we foresee that could lead to high volatility in the market? Where do we see the Sensex and Nifty at the end of 2015 and 2016? 

Ans. Higher interest rates in the US will remain as the near term risk for global equity and forex markets. However, we believe that since most investors are expecting a rate hike by the Fed, it is priced in to a large extent and hence the market impact may not be that significant. The other risk pertains to crude oil prices. Any spike in crude oil prices will impact India as we import around 80% of our oil demand. With a strong government at the center and improving macro economic variables, India remains one of the fastest growing economies in the world today. 

4. Is the oil, inflation, dollar sustainable at current levels? 

Ans. After correcting over 50% since the June 2014 highs, crude oil prices have bounced back most recently, despite no real change in fundamentals (supply). Saudi Arabia has maintained its production output despite a fall in prices, which has further dampened prices. The US dollar has strengthened against most of the global currencies on the back of improving macros and the job market. Commodities have also corrected due to their inverse correlation vs. US dollar. 

5. Is this a lump sum or a SIP market? And what are our favorite sectors/ caps to invest in? 

Ans. Investors having an investment horizon of more than 2 years could adopt a lumpsum strategy to invest in equities while investors with a investment horizon of less than 2 years could opt for a SIP strategy. We have an overweight position on financials, consumer discretionary, capital goods/industrials and materials along with oil marketing companies. We remain cautious on consumer staples.



What is the Sensex P/E?

What is the Sensex P/E?

Of all the fundamental statistics available for comparing stocks, the Price/Earnings ratio is the most widely used.

What is the P/E and the Sensex P/E? How is it calculated?
We frequently hear that the Sensex is fairly valued or trading near or above its historical price-to-earnings multiple of 18 times. The price-to-earnings ratio, or P/E, is a valuation measure that compares the stock price to company profits, providing investors with a sense of the stock’s value.
Let’s try to understand what P/E is and how the Sensex valuation can be interpreted from it.
Mathematically, the P/E multiple can be expressed as ratio of market price of a stock to its earnings per share, or EPS. For example, let’s say the stock price of Reliance Industries Ltd is Rs 900/share and its EPS is Rs 90.
Since P/E = Price/EPS, the P/E of Reliance is 10. This implies that investors are willing to pay 10 times Reliance’s EPS for that year. Do note, this is not a static figure and the latter can change every time the company declares its quarterly results. As for the stock price, it fluctuates daily. Naturally, the P/E changes accordingly.
In general, investors are greedy for highly profitable or high growth opportunities and stingy with opportunities not as attractive. Similar behaviour is displayed in P/E multiples where high growth companies trade at higher P/E multiples and lower growth companies trade at lower multiples. For example, software companies like TCS and Infosys, and consumer goods companies like Hindustan Unilever and ITC, trade at P/E multiples greater than 20. On the other hand, companies in the energy sector are trading at less than 15 P/E multiples, thanks to the current subdued oil price environment. A lower P/E can also indicate a company’s lower future earnings potential.
The above can also be seen in Sensex P/E multiples.
The Sensex composes of 30 stocks which are traded on the Bombay Stock Exchange, or BSE. The index is constructed on the basis of the free floating market capitalization of these 30 stocks traded relative to 1978-79 taken as base value of 100.
Free float based market capitalization implies all shares which are freely available for trading. Therefore, promoter equity and equity held by other entities are kept out of the free float calculation.
The Sensex P/E is the ratio of price of the index to its EPS. Price per share is derived by dividing the combined free floating market cap of all the 30 index constituents by their total outstanding shares. Similarly, EPS is the ratio of the aggregate earnings of all the 30 stocks comprising the index to their total outstanding shares. In a way, the Sensex P/E is nothing but a reflection of the individual PE's of its index constituents.
Historically, the Sensex has traded at an average P/E of 16-18 and in a range of 9-24 times EPS. During up cycle or periods of strong growth, the Sensex has traded at the higher end of the range as the earnings of the index constituents start growing strongly. Conversely, in a down cycle or during periods of subdued growth, aggregate earnings of index constituents fall or the rate of growth slows and investors are not as willing to pay a premium to earnings. Consequently, P/E multiples fall to the lower range. If the sectors which have a higher weight-age in the index do well, the Sensex P/E would largely increase.
In a given time period, different sectors trade on different P/E multiples. Currently, stocks in sectors such as oil and gas, and metals, which are facing subdued operating conditions, are trading at P/E multiples much below that of the Sensex P/E. For example, RIL and ONGC are each trading at around 9-10 times EPS.
On the other hand, sectors which are doing well, such as fast moving consumer goods, healthcare and information technology, are trading at rich multiples of 20-40 times EPS, much higher than the Sensex P/E.
Many of these richly valued stocks require a much lower capital expenditure and generate strong free cash flows with high operating margins. Keeping this in mind, investors are ready to pay a hefty premium for these stocks. Hence, when making relative valuation comparisons of the Sensex P/E to another country’s P/E, it is important to know if the index in question has a similar sectoral representation, else the conclusion would be erroneous.
Similarly, comparing the Sensex P/E in 2015 to that of the Sensex in 2005 or 1995 should also be kept in context. After all, the index composition during all these time periods would differ.
So while it’s one of the oldest and most frequently used metrics, ensure that you use it within context.

Make your 50's work

Make your 50's work
UMA SHASHIKANT

Plan so that you can enjoy your retirement years without fretting about finances
My friends and I are now in the smug 50s. We began with very simple careers and modest incomes. But we were the generation that was at the right place at the right time. When the economy opened up in 1991, we were the qualified, skilled and enthusiastic youth that grabbed the opportunities with both hands. A combination of good old saving habits and rising income has left us with assets we never thought we would accumulate in our lifetime. As the dreaded “R“ word is now looming large, we are taking stock of how our life will be when we are the end of the job-life as we know it.
Many of us do not even believe we will retire. There is the confidence that we will continue to find work and be paid for our “expertise“. The problem in this assumption is that the younger generation has outsmarted us and will continue to do so. The managers who we hope will engage us, are likely to have had better schooling, larger global exposure, finer social skills and higher expectations for performance. It is time we defined what our expertise would be, and how it would get priced in a competitive post-retirement world. If we see ourselves as “mentors“ it is time we enrolled into programs that certify these skills and begin to read, write, blog and publish to establish our credentials.
We are proud of our networks. Our friends have done well for themselves too, reaching powerful positions in their career. We are happy to be in their circles and think that this might help when we retire. May be not. The CFO of the billion dollar company derives his power from the treasury he manages. Once he gives up that job, the power quotient vanishes.So is the HR head who has the power to recruit, promote or fire management trainees to CXOs. Once he retires, people will soon figure out that he is now in the queue for jobs. Retired bankers have been aghast at the nonchalance of erstwhile colleagues, who do not even return calls.While it may provide immense scope for a good life of laughter and fun, the buddy network might not come of use for a post retirement career. Adding new young ones to the list is not easy . Many retirees find they are “being avoided“ while bragging about their glorious past.
Not everything is bleak though. There is the nice pile of assets that should serve our needs very well, and some more. With zero debt and peak income, the 50s is the time to give those assets the final push to even bigger size. It is also the time to rebalance and reallocate, when we still have the power of our job and income.It is time to ask whether that terrace flat in Navi Mumbai, or the bungalow in Gurgoan, will be useful. Will it fetch a decent rent (ask whether someone who can rent a luxurious house would have bought a property instead)? Would the child for whom it was bought bother to take a few days' leave to come over to get the stamp and registration tasks done?
Assets are all good as long as they serve a purpose. A farm house that takes more to maintain and enjoys 20% annual occupancy is a dead asset in retirement, when there are no fancy parties to throw for building professional networks. A small one-bedroom in the heart of the city might be low on prestige value, but earns a steady inflation-adjusted rental.Take charge of those assets. List them, evaluate their use, and make sure they will all work for you. Each rupee invested in your earning life, should work for you in retirement.
Many of us are so bitten by the “giving“ bug. We are eager to do something for the society and give back. But we need a plan to do that. If our assets generate adequate income and security, we can devote our retired lives to enjoyable charitable work. There are thou-sands of organisations run by spirited youth so short on time and resources. The job can be immensely satisfying and make a real dif-ference to the society . Find the causes that are dear to you. Find out organisations you like to support. Check out how they are run and how they are funded. Begin your association even as you are working. Ensure that your networks, power and mentoring activities help the organisation. Build equity and add value. Go that extra mile when you still have the energy and your limbs have not weakened. Do not wake up after retirement to announce that you are now willing to help. Many retirees have been ripped off or handed a raw deal when they make their eagerness too well known. Create your giving strategy much before retirement, with the same smartness you bring to your job.
If there is one thing in common among the 50-somethings today, it is the strong desire to live, travel, work, and have all the fun after retirement. But getting there needs investment of both money and time, now in the 50s. If you dislike weak bones and lifestyle diseases, that modification to food, work and workout should be done now. It can't wait until you retire. Get to work on your second innings, before your power, networks and health begin to decline in value.
The author is MD, Centre for Investment Education and Learning

How can financial advisors grow their share of wallet from existing clients?

Please find below a good article as appeared in Advisor Khoj for your reading:

How can financial advisors grow their share of wallet from existing clients?

One of the biggest challenges that many financial advisors face, is seeing revenues plateau off after an initial period of growth. The most obvious response is to look for new clients, but it is easier said than done. Independent financial advisors today are faced with a multitude of competitive forces ranging from other financial advisors to wealth management channels of large banks to direct channels of mutual fund houses and also online portals pushing financial products. One of the ways to overcome this challenge is to get a bigger share of the wallet from existing customers, while continuously looking for opportunities to expand the client base. Getting a greater share of wallet from the existing customers has a significant business potential for the following reasons:-
  • Equity investment is still a very small proportion of the total savings and investment corpus of the average Indian investor

  • Majority of Indians are underinsured as far as life insurance is concerned. Insurance buyers often do not buy the right life insurance product

  • Majority of Indians do not have adequate health insurance or Mediclaim. Additional tax benefits have been announced for Mediclaim premium under Section 80D of IT Act in this Budget

  • The increase in 80C tax saving investment limit from  1 lac to  1.5 lacs announced in last year’s budget, provides an opportunity to get a bigger share of the client’s wallet towards tax savings schemes

  • Additional  50,000 tax savings over and above the  1.5 lacs 80C limit was announced in this Budget for investments in the National Pension Sche
Deepen engagement with Clients
To grow their share of wallet from existing customers, financial advisors need to deepen their engagement with their customers. With the proliferation of digital technology and the internet, information is available today on the fingertips of the investors. Therefore, financial advisors need to keep themselves updated about the market and the industry, more than even before. Financial advisors should segment their clients by age groups, income levels and financial awareness levels to customize their engagement with them. The mode of engagement also has to be tailored as per the client’s preference. Some clients prefer face to face meeting, while others prefer communication over the phone or emails. It is often seen that financial advisor communicate with their clients only when they are doing a sales call or fulfilling a service request. This does not necessarily deepen the engagement with a client. An excellent way to deepen engagement with clients is to conduct regular portfolio reviews. A survey of under 50 high net worth wealth management clients in the US has shown that these clients prefer to have weekly or monthly review meetings with their financial advisors. While engagement needs differ from customer to customer, financial advisors need to figure out what works best for their customer. The primary objective of portfolio review meetings should be to review the portfolio performance and progress against different financial goals set by the client. Financial advisors should not deviate from this primary objective. They should also use these meetings to gather more information from the client, so that they can provide more holistic financial advice to clients factoring in income and expenses, assets and liabilities, tax situation and other considerations. Financial advisors can ask for more business from their clients in these meetings only if it relates to the primary objective of the meeting, which is to review progress against the financial goals of the client.
End to end servicing for the client’s entire portfolio
Financial advisors can offer end to end servicing of the client’s entire portfolio holding, irrespective of whether the client did the transaction with the financial advisor or through some other intermediary / broker. At the beginning this may be too much effort with no tangible gains and therefore financial advisors should exercise their judgement in offering this service to their clients. But this offering definitely has benefits for both the client and also the financial advisors. Mutual fund advisors can offer to service the entire mutual fund portfolio of a client and then gradually expand to life insurance policies, fixed deposits, post office savings, equity holding (Depositary Participant Holding), home loan etc. Advisors can take advantage of several online resources available in the market. Some of these online resources are available free of cost, while others are available for a fee. Servicing the entire portfolio of a client, not only deepens the client advisor relationship, but also provides insights into liquidity events. Liquidity events are situations when the client has additional liquidity or investible cash. Examples of liquidity events are maturity of life insurance policies, fixed deposits, national savings certificates, close ended mutual funds, debentures, sale of a large block of shares, house etc. Financial advisors need to be focused on capturing a portion of the proceeds from these liquidity events to grow their share of wallet.
Develop expertise in multiple product classes
Financial advisors should build expertise in multiple product classes, to expand their scope of financial advisory to their clients. For example, insurance advisors can broaden their advisory scope to mutual funds and other investment products. Getting additional professional certifications like IRDA certification, AMFI certification, Certified Financial Planners (CFP) etc is always helpful in expanding your financial advisory business. Even if financial advisors do not sell a particular product class, building knowledge across multiple product classes is always useful because they can help their clients make the correct financial decision and in turn expand their share of wallet. For example, a mutual fund advisor with life insurance expertise can help their clients buy adequate life cover through term plans and in turn get a bigger share of their client’s wallet for mutual fund investments that may have otherwise gone into paying premiums of life insurance investment plans. Financial advisors can also diversify into alternative asset classes, e.g. real estate. However, financial advisors should always ensure that focus on multiple fronts should not take away their focus from the core business.
Build Income Tax Knowledge
Though tax advisory and IT returns filing typically falls in the realm of Chartered Accountants, tax knowledge can be very beneficial for financial advisors in growing their share of wallet from existing customers. Tax knowledge should go beyond the provisions of Section 80C of Income Tax Act, which most financial advisors are familiar with. Financial advisors should be able to provide tax related guidance with regards to multiple asset classes and help their clients make the most tax efficient investment decisions. This not only will help financial advisors build more credibility with their clients but it also can help financial advisors get more business from their clients.
Financial advisors should build a differentiated offering and brand
While all the above strategies are enabling mechanisms for financial advisors to grow their share of wallets from existing clients, financial advisors should ask themselves one fundamental question for these strategies to work. Why should a client do business with him or her and not with another financial advisor or other wealth management channels? What are the key differentiating attributes and offerings that make it beneficial for the client to do business with a financial advisor? Financial advisors should think about these attributes, not from his or her perspective, but from the client’s perspective. The advisor should not only be able to communicate these attributes very clearly but more importantly, they should ensure that the client experiences them in each and every interaction.
Conclusion
Once they reach a critical mass, financial advisors should prioritize client retention and growing their share of wallet from existing customers to acquiring new customers. In fact, a great by-product of client retention and consolidation is getting client referrals, which can help advisors further expand their business.

Is over diversification a problem?

Is over diversification a problem?

Could it be possible that one over diversifies their portfolio? Would that be a problem?
In the overall scheme of investor problems, over diversification isn't the worst sin. Having too many holdings won't wreak the same havoc that under saving will, or performance-chasing.
Nevertheless, at Morningstar we believe that there's a practical risk to being too diversified. When you own too many stocks and mutual funds, it becomes nearly impossible to get a good knowledgeable grasp on each holding. When you lose your focus, you lose your competitive advantage as an investor. Instead of having a competitive insight, you begin to run the risk of missing things.
Christine Benz, Mornigstar’s director of personal finance who is based in Chicago, says that for every single portfolio she receives that is whippet-thin -- without an excess stock, fund or ETF to spare – she comes across 10 more that have 50, 60 or even 100 individual holdings. She refers to over diversification as portfolio sprawl and believes that it can add to investors' oversight challenges.
It can simply be difficult to keep track of the fundamentals of so many holdings, especially if those holdings include individual stocks along with actively managed mutual funds of various categories. The investor with too many holdings may have trouble figuring out asset allocations or knowing when or how to re balance.
No matter how logical an investor you believe you are, you could get carried away and buy on whims or fall for the latest market craze. Some investors pick up certain funds or stocks which have a “cult status” so to speak. Splintering your portfolio into too many different funds and can dilute the impact of any one investment. An over diversified portfolio can stunt returns and amplify risk. By blindly assuming more is safer, over diversification gives a false sense of security.
Cut off the excess
You need to diversify smartly. Having a glut of funds is not smart diversification. For instance, a portfolio with three mid- and small- cap funds, three sector funds, an index fund and three large-cap funds is not a well diversified one just because it has 10 funds.
Does the index fund track a large-cap index such as the Nifty or Sensex? That would translate into four large-cap funds. Are three sector funds necessary when the other funds are diversified equity funds investing in all the relevant sectors? Does one need an exposure to three different mid-cap funds or would two just suffice – one with a value blend and the other with a growth tilt? Does the overall portfolio have sufficient debt exposure since none of the funds are balanced or debt oriented? Such questions would need to be answered when viewing the portfolio as a whole and preferably with the help of a financial adviser.
When trimming the flab, view in totality your portfolio of equity, debt and tax planning instruments.
Consolidate the portfolio
Reduce the number of holdings in your portfolio and ensure that each is best of breed. But don’t focus exclusively on trailing returns. If you find duplicative holdings in a similar space, the natural tendency is to kick to the curb the one with the lower trailing returns. By focusing disproportionately on investments with happy-looking trailing returns -- especially over the past 1 to 3 years, investors may inadvertently tilt their portfolios toward higher-risk, higher-volatility investments. 
Investing in stocks directly
Many investors use mutual funds for the bulk of their portfolios while also maintaining a smaller basket of stocks on the side. If that describes your setup, reflect on your past behavior and performance as a stock investor. If you have tended to do your homework on your companies and have generated strong performance with this part of your portfolio, that may argue for making individual stock holdings an even larger part of your portfolio than they already are. But if you have amassed a portfolio of individual equities more haphazardly -- and monitored them not at all -- it's a good time to ask yourself what those small positions are actually doing for you. If your total position is fairly small, it's adding to the clutter in your portfolio but doesn't have the potential to dramatically alter your bottom line, for better or for worse.
It is not without reason that diversification is referred to as the only free lunch in investing. But it is possible to have too much of a good thing.

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