Managing Your Portfolio In The Smartest Manner

Rashmi Wankhade believes while wealth accumulation depends on taking the right investment decisions at the right moment, it also equally depends on managing portfolio smartly. She finds out how an investor should effectively manage portfolios to make more of the investments made.

Peter Lynch- American investor, mutual fund manager, and philanthropist, once said: “Know what you own, and know why you own it.” 

Portfolio management rests on the same theme that one must know which fruits investors have in their baskets and their appetite for them. Portfolio management is a long distance run and there are no short cuts to it. James Morton rightly said: “Most people who make lot of money in the markets over the long term do not trade frequently.” Investors should follow the same line of action while building up their portfolios and should focus on investing rather than trading. 

History suggests that one should start early in working life to build up one's portfolio as there are less financial obligations at that time. It can fetch them huge returns over a period of time by getting advantage of the time value of money. The first thing to build up a portfolio is to determine your investment profile.

This exercise is useful to evaluate your financial needs, time frame, tolerance to risk and objective behind building up the portfolio. It will help you understand the type of investment you are looking for and, accordingly, decide on the investment strategy for the same. Knowing one's needs and goals, one can allocate funds for different assets, including cash, stocks, bonds, commodities, etc while creating the portfolio. Asset allocation depends on one’s income, so the larger the income, more asset classes and risks can be taken by investors. 

Investors should also check their tolerance to risk. If one remains calm in volatile markets and holds on to the position, then he has high tolerance to risk. If one gets anxious on such fluctuations, then he has low tolerance to risk. If one can’t bear such fluctuation and gets hyper on every dip, then such investor should avoid investing in stocks and play safe by holding cash and debt assets only.

Before building up a portfolio, an investor should set the financial goal for creating the portfolio. There can be different goals of individual investors, such as retirement, education, home, etc. Depending on the goal, one should also decide the time horizon for the portfolio to achieve the financial goal. Also, one needs to know one's expectations of return on investment that would be needed to achieve the objective. A reasonable time period is five years, which can make it possible for investment to bear sweet fruits.

After this step, we get five types of investor profiles-

1. Conservative

1. Conservative - Investors who are predominately risk-averse belong to this category. Primary focus is on portfolio stability and conservation of capital. Conservative investors are willing to achieve investment returns (adjusted for inflation) that are low or, during some years, negative, in exchange for low risk of principal loss and a high level of liquidity. A typical portfolio will be heavily weighted toward cash and fixed income investments.

2. Balanced- Investors who are somewhat risk-averse belong to this category. Primary focus is to achieve a modest level of portfolio appreciation with minimal principal loss and volatility. These investors are willing to absorb some level of volatility and principal loss. A typical portfolio will include mostly cash and fixed income investments with a modest allocation to equities.

3. Aggressive- Investors who are willing to take a moderate level of risk. Primary emphasis is to strike a balance between portfolio stability and portfolio appreciation. These investors are willing to assume a moderate level of volatility and risk of principal loss. A typical portfolio will largely include a balance of fixed income and equities.

4.Moderately Aggressive- Investors who are willing to take a fair amount of risk. Primary emphasis is on achieving portfolio appreciation over time. These investors are willing to assume a high level of portfolio volatility and risk of principal loss. A typical portfolio will have exposure to various asset classes but will be primarily weighted toward equities.

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5.Highly Aggressive- Investors who are willing to take substantial risk. Primary emphasis is on achieving above-average portfolio appreciation over time. These investors are willing to assume a significant level of portfolio volatility and risk of principal loss. A typical portfolio will have exposure to various asset classes but will be heavily weighted toward equities.

How to go about portion of equity portfolio?

Once an investor knows his investor profile, he can think of apportioning equities/stocks from different options available in markets. “Behind every stock is a company. Find out what it is doing,” advises Peter Lynch. We believe that investors should invest in the industry they know about. It will help them keep track of the portfolio easily. For example, If one is fully aware about agro-industry and the seasonal impact on agriculture production, its drivers and demand-supply equation, then one can easily analyse fundamentals about a company that caters to agriculture and its stock price movement. It will eventually help the investor to track such assets in portfolio and take informed decision while managing one's assets. Investors can follow different sources like market related web portals, magazines, newspaper to get knowledge about markets and industry. Some investors can also follow different technical tools available for taking decision on the basis of technical analysis.

Recently Warren Buffet, legendary investor said in his letter to shareholder that investors should try to take advantage of the greed and fear cycle. The coming years can deliver market decline that can affect all stocks in the portfolio. In such panic situation, investors should consider widespread fear as a friend and go for bargain purchase. Secondly, investors should consider personal fear as enemy. This approach will help investors to sit on a larger collection which will eventually do well in the longer game.

Building up Equity Portfolio

Building up equity portfolio is a challenge that can fetch good returns if stocks are picked up thoughtfully. Investors should have a mix of bouncers and star performers in portfolio.

In our definition, the 'star performers' are fundamentally sound companies that are available at attractive valuations and have the potential to give handsome returns. On the other hand, bouncers are those stocks that perform beyond expectations, led by positive macro-economic parameters, news, favourable events or policy changes. Such economic reports and other news can have short-lived effect on some stocks. These companies may not present stronger numbers as compared to the star performers, but they have the potential to perform well led by industry tailwinds. For example, the government emphasis on digitisation will present ample opportunities to companies like Sterlite Technologies, TVS Electronics, etc. in future. The stocks of these companies had performed well led by news on economic reforms. Investors can have ~25% exposure to bouncers with a six-month time frame and the remaining 75% should be devoted to star performers with horizon of one year or more. This strategy helps to manage risks associated with an equities portfolio and get advantage of news runners.  

Diversification

Investors should also focus on diversification of their portfolio. Investors must select stocks across broad spectrum of market categories. One should go for stocks of companies paying good and regular dividends (high dividend yield) as well as stocks with long term growth potential. If one is having high risk appetite, then one can also include high growth stocks from small and mid-caps. We should give 20 per cent weightage to small-caps, 25 per cent weightage to mid-caps, 30 per cent weightage should be given to fundamental strong companies with dividend yield of more than 5 and remaining gap can be filled with bouncer stocks.

Optimum cost 

One should go for brokerage firm that charges minimum brokerage and stop paying extra commission and save your hard-earned money. Investors should also avoid frequent buying and selling of scrips in response to markets ups and downs. One must have disciplined and a patient approach while investing. This basic rule will help save brokerage cost and save cash losses when price of your stock declines.

Proper Asset Allocation

Investors should not allocate more than 4% on any of the scrips. They should have investments upto 4% in one scrip to gain advantage of diversification. It also gives their portfolio immunity against odd market conditions.

Monitoring of Portfolio

After building up your portfolio you should monitor it at least once a month, depending on the financial objective of building up the portfolio. You should check whether the asset allocation is in line with your objective, and if is not, whether any reallocation of assets is needed. One can follow Warren Buffet's approach of adding same assets at bargain price and adding more assets. This approach will help to maintain proper mix and match of assets and give a desirable risk-reward ratio. Over the time, rise and fall in financial markets could disturb your asset allocation but monitoring it will help you to rebalance your portfolio allocation.

Tax Consideration

Investors with focus on tax gain over investment can have a portfolio investment horizon of more than one year. Such investors can reduce exposure to bouncers and add companies with higher dividend yield in portfolio. 

Disciplined, regular and diversified investment can turn one into a superstar investor who sits on a gold mine. Our experience says long term investment strategy always plays double hand and can give your portfolio the requisite push to fulfil your dreams. With this we wish our investors happy investing.