Ensuring a core equity portfolio is important to keep you hedged against slump. Some dos and don'ts to build a healthy portfolio
CAN you manage a conglomerate of 50 different businesses all dealing in diverse products and services? If not, then why would you own an equity portfolio comprising a large number of stocks? After all, an investor cannot afford to forget that stocks represent businesses. Each time one buys 100 shares of a company in search of the next Reliance or the next HDFC on some tip, it might not be the best thing to do.
Your ability to track and your need for diversification across sectors along with your risk appetite should decide the number of holdings in your portfolio. The problem starts when the markets swing into one extreme and investors typically react to the extremes by displaying either greed or fear. In good times, they own too many stocks and in bad markets they own too few resulting in lack of monitoring or lack of diversification, respectively. Striking the right balance holds the key to wealth generation. A seasoned investor would always have a core portfolio. A core portfolio is for the keeps and shares in this portfolio are rarely traded. Exits are rare and made only after fading of the underlying value proposition that makes them tick is ascertained. Rather, investors prefer to keep adding their positions in such stocks in a weak market. These holdings primarily include blue-chip ones with a long-term performance track record or large-cap equity mutual funds. Of course, you can have some allocation for 'flavour of the season' if you are comfortable with momentum investing. But in no case such momentum calls should outweigh the core holdings.
Under no circumstances, should you invest more than 20% of your equity investments in one stock, even if your personal stock portfolio has merely 10 stocks. Too much exposure to one stock can hamper portfolio returns if things go bad with that company in which you have invested heavily. At the same time, there is no sense in investing if you are not giving due weightage to a stock. In my personal portfolio, I do not invest in a stock if I cannot commit at least 4% of my investible money to it.
Take a simple example. You spot a 10 bagger stock and invested only 0.01% of your money in it. A 10-fold rise even in a short span of time will not have material impact on your portfolio. You have to make it a 'meaningful' investment.
KEEP IT SHORT & SIMPLE
BUILD YOUR CIRCLE OF COMPETENCE If you are a medical practitioner, probably you have a core understanding of healthcare and pharmaceutical business. Identifying good companies there and buying into them at lower levels can be a good strategy. One can also look at something that we come across in day-to-day life such as consumer goods. Goods and services preferred by most may develop the pricing power and become a good investment in the long run.
STICKING WITH PROVEN WINNERS Spotting the next Infosys is probably the biggest value accretive proposition with the highest degree of risk. But most of us tend to forget that Infosys Technologies is a success in its business and risk of failure is low. Your risk profile should decide whether you want to search for tomorrow's winners or you intend to stick with today's winners.
WEED OUT THE LOSERS Twenty five years ago, Ballarpur Industries, Century Spinning, Bombay Dyeing, Great Eastern Shipping, Siemens, Peico Electronics (Philips), Kirloskar Cummins, Premier Automobiles, Hindustan Motors, Ceat Tyres and Voltas were considered to be blue chip companies. Though blue chips do not fall out of favour overnight, over years there comes an inflection point in the life of a company when its shares start lagging. While you must have a core portfolio, it is important to identify the laggards every few years
