Diversification - to reduce Risk -> (25 to 40
Stocks))
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LargeCap (60%)
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MidCap (30%)
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SmallCap (10%)
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Stocks (70%)
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NCD / Liquid Fund (30%)
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Investment Capital (85%)
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Gold (15%)
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Portfolio Management - to protect Capital
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Are you new to Investing? Read our eBook “Simplify Investing” before you start to invest.
This one book covers all the aspects of investing an investor must know which has
been compiled from various popular books and our key learnings from investing.
This will surely avoid hassle of reading 100s of books and getting confused
with contradictory views leading to losses.
How to use Stock Reco. with Investment
Horizon (2-3 Years)?: Stock recommendations are posted on weekly basis on the home
page of this blog either on Saturday or Sunday. Buy the stock when indicated
current price is < 5% compared to LTP (Last Traded Price). If the price has
moved more than 5%, look for another stock or wait till price drops. Stock
holding period for this is normally 2-3 years, 4-5 years for specific stocks if
required based on long term prospects.
Portfolio Management - Protect your
Capital, balance your risk (Rule “60/30/10”): Largecap
stocks are low risk low-moderate return, Midcap stocks are medium risk and
moderate-high return, Smallcap stocks are high risk high return. Strictly
follow the risk distribution of Largecap-60%, Midcap-30% and Smallcap-10% as
mentioned in above diagram to protect your capital from adverse market
movements or recession.
Diversification – Reduce your risk
by not putting all your eggs in single basket (Rule “25-40”): There
may be situations like Satyam... where stock fell steeply from Rs.700 to Rs.11
in few days. Diversification helps you in such situations if you happen to hold
one of those black ducks. You may choose to diversify between 25 to 40 (< 25
increases your risk of losing on a single stock, > 40 will dilute your
returns.)
How to build a Portfolio?: Say
you want to build portfolio of 25 stocks with capital of 5 Lakhs. You need not
wait till you save 5 lakhs to begin with. Look at how much you can afford to
save every month, say Rs. 20,000. Pick your first stock from Largecap worth
Rs.20,000 from whatever opportunity is available on that day, 2nd stock
in the second month and so on. By end of 2 years you should have accumulated a
portfolio of 24 stocks which includes 14 Largecap(~60%), 7 Midcap(~30%) and 3
Smallcap(~10%) stocks. If one of the stocks meet the target price, sell and
replace with another stock. As your portfolio grows, try to increase the amount
you invest per stock, say from Rs. 20,000 to 30,000 and so on. At any point of
time make sure you are within limits of rule “60/30/10”and “25-40” rule. Read more about this
is in Simplify Investing eBook.
How to face bad times?: There may
be situations where you may have to sell a stock at 50% loss if the company is
facing bad weather. This is very common in stock market. Please read Simplify Investing eBook to get more
knowledge on stock market behaviors. This will help you to think logically,
accept the losses and move forward. Replace it with another stock which has
significantly dropped from the buy price and still has BUY on it.
Weekly Tracking, spend only 15 mins
per week: Don’t track market on daily basis, spend only 15 mins a week to
review the status and see which ones need your attention. Remaining
disconnected from market will help you to reduce the stress and avoid any
decisions based on emotions (greed/fear).
Invest in Gold ETFs and NCDs /
Liquid Funds: Also make sure you are investing in gold and NCDs/ liquid
funds as per percentages in above diagram. This is very important aspect of
Portfolio Management. Gold prices are seen to move up when market goes down or
crashes. This way it will balance your portfolio during crises. NCDs give 2-4%
more fixed interest than fixed deposit with minor risk involved and are
illiquid. You may buy 5-10 different NCDs to reduce any risk. Liquid Fund gives
similar or little more returns compared to fixed deposit, still being liquid in
nature. This will help you to take care of your unexpected expenditures
and personal emergencies without need to sell the stocks for money in such
situations.
How to use Stock Reco. of Value Investing?:
Apart from above mentioned, set
aside a good portion of your money which you can live without for next 10 years.
For Value Investing or Very Long Term Investing, investment horizon is 10-15
Years. With this strategy you can take advantage of large movements in stock
price in the long duration which would otherwise be a missed opportunity for
2-3 Years strategy as you would exit early. Read more about this is in Simplify Investing eBook.
How
to invest for life long investing?: If you are starting very early at age of 25-30, it
would be wise decision to passively invest in Index ETF using SIP (Systematic
Investment Plan). Since Index ETF has best of best companies and well diversified
and well managed as per allocation in index, you don’t have to worry about timing
the market. Most of the time market remains in depression and you will end up
accumulating more units during depression when you follow SIP. Read more about
this is in Simplify Investing eBook.
Cheers and Prosperous Investing!!!
Simplify Investing Team
