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Portfolio Building"Do not put all the eggs in one basket".Very important and great insight meaning phrase we always consider before proceeding for investments. We should not consider this in only equity/mutual fund and bonds investing but this is important while choosing among all the tools of investing. A successful investor is not only about picking the right stock but also about proper portfolio building. Few of us might be thinking that there is nothing rocket science, we just have to pick all the different options available and invest in all of them and portfolio building is done, but this is not that easy job, in fact, this is the most difficult and tricky job in investing. we will try to cover all the tricky things we should keep in mind while building a risk proof portfolio.  Why most people fail to generate maximum out of their investment?After learning the technical analysis as well as the fundamental analysis concept many people not able to appreciate their investment value and end up their portfolios red, the biggest reason is poorly constructed portfolio and still proper portfolio construction knowledge and requirement ignored by all the investors. Do Diversification works?All the financial advisors and experts suggest you diversify your portfolio so I have tried this while building my portfolio, I have bought many stocks with different values. After 6 months I find my portfolio is down 20 % and after 1 year it was 30%. I was very worried that what is happening to all the companies I have invested in. When I studied then found that we all read the things but unable to come with the proper meaning of the advice by the experts. When diversification can do wonders with your portfolios then wrong or over-diversification can build up huge losses. What is Diversification?Diversification means make a beautiful bunch of anything with all its variety and breed available in the market, in investing diversification means do not make a complete investment in one asset/in one company, The real meaning of investing in equity is diversify your portfolio in different sectors or industries in spite of different stocks of one sector. 
With two constructed portfolios above we can see that both the portfolios are diversified but which one is properly diversified is the most important. In portfolio 1 we have 18 companies stocks and when there would be any market slowdowns or economy hampers due to any uncontrollable circumstances then portfolio 1 would be the biggest challenge to manage with. The reason is that we have many stocks from the same sector and if one sector performs badly then you would get a major dent on this portfolio. On the other hand in portfolio 2, you have only 6 companies stocks and these are the leaders of their respective industries so when there would be a downturn in any situation you would be having a chance for soon recovery or you can easily average out a few stocks if they will go down which is next to impossible in the portfolio of 18 companies. Steps we need to take care in Portfolio BuildingAsset Class AllocationThis is first but the most important concept in portfolio building as this requires the study about your financial objectives and goals on which you will proceed further. Asset class allocation could be different from person to person, the age to age, and profession to profession. A person of 20 years has different financial goals from the person who is of 50 years and planning for his retirement. The 20 years person probably ready to take more risky bets than of 50 years old man. so, first of all, you need to check your personal traits and then you need to make compatible goals with respect to your income and then you have to find out the trend in the market like some time the trend id equity, some times gold, some times bonds, etc. Your risk-taking ability plays a major role in asset class allocation, the person who is conservative may choose safer and fixed income options, on the other hand, if anybody is aggressive then he choose the high-risk high return options or they may give the maximum of their investment as their respective category. Here we need to check for the quality diversification while allocating the asset class. Learn how to do Fundamental Analysis of any company.  Prepare a PortfolioPreparing a portfolio is a part of portfolio building after you decided over your asset allocation you will work on the sectors in terms of stock selection, Companies in terms of Fds and bonds, debt funds. Once you rightly decide assets allocation now you have to divide your money into different sectors and make a risk proof portfolio. If you have chosen 70% of your investment would be in equity then deciding among various factors like sales, profit, market capitalization, Goodwill, Price momentum, etc. If you have chosen bond investing as a major part of your investment then you need to check the type of bond, coupon rate, maturity, credit rating, etc. If you have chosen mutual funds then you need to check CAGR, fund managers' experience and expertise, exit load, entry load, etc. After deciding on all these you can prepare a well-diversified portfolio that can be treated as a lifetime umbrella for you value investing. Deciding on Portfolio weightThis is the next important steps we have to decide upon. suppose we have 5 lakh to invest and we already decide on asset allocation and prepared our portfolio that we need to invest 70 % in equity 10% in mutual fund 10% in bonds and 10% in Gold. Now among 70 % of equity, we also decided which are the sectors we need to invest so this is the point where we have to decide how much money we are going to allocate a single sector. Portfolio weight is important to decide because it confirmes our long-term profitability or loss. If we take the current scenario of Covid-19, then most of the brokerage's houses are bullish on pharma sector due to very high consumptions of pharma products and services also vaccine and medicine are waiting to come ASAP and in the same hope, all the pharma sector is running towards its lifetime high that was in 2015. But before that, it was in a downtrend since 2015. So those who are investing nowadays giving good weightage to parma stocks.  Rechecking your portfolioRechecking the portfolio quarterly and half-yearly is also a very important task as it will give you the guarantee card towards your decision. On the basis of performance, you can do reshifting and reassessment in your portfolio. In this part, you can add-on or delete the securities from your portfolios if they are performing or underperforming respectively. To rebalancing, you have to check the broad market scenario along with the company wise performance. If the company is posting losses in 2 or more quarters then you may decide to reshift your position ASAP. Problems with a huge number of stocks in the portfolioIf you hold 50 -60 stocks in your portfolio then you would be in trouble in long-run, generally, people think that they are hedging by investing in so many stocks of one or more sectors but they are reducing their long-term gains due to below reasons: Tracking becomes difficultTracking stocks doesn't mean that you need to check the stock prices daily. You have to check your portfolio weekly basis and the most important is evaluating quarterly results and always updated about the sector and company performances. If you have 50 stocks in your portfolio than would it be possible to check the annual report of each and every company or listen to the management commentary every time, It is next to impossible for the working person to do such jobs regularly. So keeping your portfolio compact can help you with this. You can keep yourself updated with 10 to 15 stocks easily.  Impact on your long-term returnCollecting 50 stocks into your portfolio can affect your long-term return because there are only a few companies can give multi-bagger return and few give CAGR of 20% and some of them give 10% rest all either give flat return or negative return. If you have 5 stocks that give you multi-bagger return and rest all are not doing good then your aggregate portfolio will not do good and the stocks which give you 100% return will only use to share the load of your bad stocks. Limit your portfolio with 10 to 15 best-performing stocks or the leaders to get the best benefit. "If you don't find the way to make money while you sleep then you will work until you die" by Warren Buffet |
Do you know your investment! Do you know your investment ! Investing is not only about money, but it is also about your emotions and hard work. If your investment is not fruitful and rewarding then you would not be motivated to do more hard work. A good and successful investment is like another earning member in your family who will take up your money, make your money work, and give you long-term returns. Investment is like buying today and consuming tomorrow, with an increase in quality and quantity. In other words, protecting our future and creating wealth. The purpose and meaning of investing can be different from person to person and profession to profession. Like the person earning 50k in a month, would be having a different investment objective, then the person earning 25k. Even their responsibilities would also play a vital role in investing, depending on their conditions, maybe the person earning 25 k is not having any major responsibilities while the person earns 50k ...
Very good blog .
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ReplyDeleteEveryone of us require to read as well as study this blog, many important things are given here. To make a proper portfolio of our investments the blog is more helpful to us.
ReplyDeleteDiversification is not only important for equity or market but also in our all over investment portfolio that includes fixed return schemes like FDs and RDs
ReplyDeleteBonds etc. Diversifying our overall investment reduce risk of loss
Relevant and knowledgeable content... keep going 👍👍
ReplyDeleteNice blog!
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