How to make a good stock portfolio?

Whenever there is a talk on the stock market. Everybody might advise you to make a good portfolio. But the question which arises later is if I know one or two stocks are going to perform well then why do I need to make a portfolio? Why should I make a portfolio rather than investing in a stock or two? And while making a good portfolio. which all aspects we should take care of. Which would help us a lot in creating a good portfolio.  If your portfolio is good then in long term you can expect good returns out of it. Other than this if you are thinking about returns then good returns would definitely come but if the market goes down and your portfolio is good. Then in comparison with your market, the portfolio will go down less. Which means you will face less losses.

How to make a portfolio? First, let’s discuss why one should make a portfolio. A lot of people are heard saying thatI know this stock will perform really well and if I put all of my money into this then it will give me a return of 30-40%On the other hand, if I make a portfolio it might only give me a return of 15% to 20% in a year. So why should I make a portfolio instead of choosing just one stock? But I want to make you understand here that If you make investment in just one stock. That stock might give you a return of 30 to 40% yearly. And it is possible that a portfolio gives you a return of only 15% to 20% . But whenever we talk about investment, It is done for the long term, 5 to 10 years. Assume that one stock gave you a return of 30% in one year. Then in the next year, it only gave a return of 5% to 10%.

A portfolio in the next 5 years will consecutively give you a return of 15%. The money that increases in comparison to one stock there is way higher. Other than this, If I talk about risk. If there is a risk factor in one stock which you did not even think of  then your chances of losing money increases. In that place, If I talk about Portfolio. Then in a portfolio, if a company didn’t perform well. Then your overall loss is not reduced much and it doesn’t impact your return much.

If I give you a small example of Satyam. Satyam, at a point of time, was a very well-performing stock many people might have directly invested in it thinking that Satyam is a good company. and will give good returns in the future but then there came an issue which no analyst told you about, nor did anyone think of. but if anyone had invested their money only there, then their whole investment would have been in loses. So imagine, If there can be a risk in such a big company so If you choose a small company, how much your chances of risk will increase. That’s why it is told, how important it is to make a portfolio. Now I will tell you while making portfolio what are those 3 things that you should focus on?

The first and most important point which comes out while making portfolio is of diversification. You must keep a good diversification in your portfolio. If I know one stock is going to do well, then what is the purpose of doing diersification. The simple meaning of diversification is that one should not put all their money in one stock or in a particular company but divide it in different places. After dividing, If you have chosen all good assets then you can benefit from a good diversification. Now, what’s the benefit of diversification? It definitely helps your returns

The best benefit that diversification gives is managing your risk. Assume, If the whole market has started going down and you had selected 5 to 6 sectors in your diversification wherein you had allocated your money. Now when the market was going down, out of those 6 sectors, 2 sectors were going up cause you had diversified your portfolio, it didn’t bleed as much as the market did so the benefit here is you don’t face much losses in comparison.

Now, I will give you a real-time example. As you know, Cause of COVID, Nifty started going down. The nifty which touched 12400 at one time, went down to below 8000 And almost all the investor’s money invested in the stock market went down. But people who had diversified their portfolio had allocated in all the sectors. Their portfolio performed pretty well and did not go down at a very high rate.

The two sectors which performed well were Pharma and FMCG. Now assume if I am an investor and I have Rs. 100 When I was distributing money, If I had put Rs 10 to Rs. 15 in Pharma sector or Rs 5, Rs. 10 in FMCG sector. The benefit of diversification would have been that. These two sectors would have performed really well in my portfolio while the whole market was going down. So diversification helps you in such difficult times. Now the question is, How should I do diversification? And If I am very bullish about a sector then how should I diversify?

While doing diversification, you should think of all the asset classes. Say If you have Rs. 100 which you want to invest. Now you think, from this Rs.20, you will invest in debt mutual fund cause you want to make an investment there for a short term. Now the balance is Rs.80. Now you thought out of this, minimum Rs.50 you want to invest in equity.

Now when it comes to equity, you think how much you want to put in large-cap, mid-cap or small-cap. Now your total investment is Rs 20 plus Rs. 50, Rs 70 but still you have a balance of Rs. 30 In Rs. 30, you can get exposed to another asset class. You plan on putting Rs.10 in Gold, cause you think if equity market goes down then at least gold will do well and this amount, I will always keep in gold so that I always get the benefit of diversification. Like this, you invested Rs.80. The balance of Rs. 20, you kept Rs. 10 as an emergency fund cause in case of emergency, you can take out money from here instead of touching your portfolio.

Now the balance of Rs. 10, you can use in investing in international markets. Cause there are many international stocks which give you exposure to the international equity market. You can invest there as well. This was just an example of how you can allocate your money in order to get the benefit of diversification and you can get the benefit from investing in different asset classes. Cause if one asset class doesn’t perform well, then the other asset class will Which will give you a good benefit and will create a good portfolio. You will get a good return in a good time period and when the market is going down, your portfolio won’t go down much in comparison.

Now the second most important aspect which will help you create a good portfolio. The name of this aspect is Risk Management. Risk management is very important for you to create a good portfolio. Now you might be thinking, how can I do Risk Assessment? After risk assessment, how can I do risk planning? Now the meaning of risk is things don’t happen according to your plan. Now you assumed on Rs 100, you will get a return of Rs. 20. Now rather than getting a return, your money started going down. Now that’s your risk, in every investment you have to take some risk cause without risk, you cant make any return.

Now for an investor, it’s important for him to know his risk-taking capability more than his returns. Every investors risk-taking capability is very different from other investors. That is why it is said, one should not copy anyone’s portfolio and design a portfolio after analyzing one’s own risk-taking capability. Now,  let’s take an example of an investor who does not want to take any risk on his invested amount and is looking for a constant return.

So what should he do according to you? I will say, a person who does not want to take any risk should invest majorly in debt mutual funds in his portfolio and in gold, FD and if possible, a small amount should be invested in Equity.  And in Equity, he should invest in large-cap stocks, not in small-cap or mid-cap cause that investor has clearly mentioned his risk-taking capability is very less and whose risk-taking capability is very less should invest in assets with a constant return cause if he thinks of more return and chooses such assets, then his risk management will get spoiled.

Now, I will give a second example of an investor who can only take moderate risk and doesn’t want to take any high risks. What should be the plan for him? Assume he says, he can take a moderate risk or a little more than moderate risk. The more the risk-taking capacity of an investor increases, the more he can allot money to invest in equity cause if you invest in Equity, your risk would increase but with that, your chances of earning a better return also increases.

Now I will talk about the third investor, who says he can take any amount of risk but he wants high returns.Now even for such an investor, it is not advisable to put all his money in equity. So for the investor with high-risk capability, it is preferred that he invests 70% to 80% in equity and invest the balance in other asset classes for a good overall asset management. So that his risk doesn’t increase very much and if one asset class doesn’t perform well his chances of panicking might increase and when an investor panics, he ends up making really wrong decisions

Now the meaning of portfolio isn’t that you have only invested in 10 to 12 stocks. The meaning of your portfolio is where your total money is invested. Now equity is an asset class in your portfolio, FD is an asset class and Gold is an asset class and when you see your portfolio’s return. You should see your return on the invested money and should calculate your risk and then manage your portfolio.

Now  Let’s talk about the third and last aspect to make a good portfolio. Till now as we spoke of the portfolio, I told you how to make a defensive and a good portfolio. A lot of people ask as the market is running low these days, how should they invest their money cause they feel there are many stocks which have a lot of value but are undervalued in the current situation. These are the stocks, they want to invest in to get a good return in the future.

So how to answer such questions? Now  assume you are an equity investor thinking of investing in the equity market now So,  it is suggested to invest in such a company which will give you good returns and can survive in a difficult volatile time.Now in such a time, should I miss out on an opportunity to get a good return? and if I don’t want to miss such an opportunity, how should I think of investment.

Now If you want to invest in stocks as the market is really down.Now when the market is in such a volatile position, the first rule that you should follow is. You should not invest all your money at once and invest money in small chunks at small intervals like you do SIP in mutual fund’s case. Now after investing money like that. Now you feel there are some good stocks. There are some small-cap stocks wherein you can get some good return.  If you want to invest in such stocks then you can invest 10% to 20% on them. Which are small-cap and mid-cap stocks and have high growth potential.

You should invest only 10% to 20% there, cause the market is volatile and if it further becomes more volatile, then you should have some good stocks in your portfolio cause if the market keeps going down, it keeps giving you moderate returns and if the market is going up and If you have invested 10 to 15% in undervalued small and mid-cap stocks. Then it can give you an extraordinary return then your overall portfolio would be very balanced cause there might be some stocks which can give you a good return and there might be such stocks

That if it is difficult in the coming times then your portfolio won’t bleed as much comparatively. So you can think of your portfolio in a similar manner. How and where you want to allocate. But let me tell you one more thing here. You should match your allocation with your risk cause your risk tells you how and where should you invest So more important than making a portfolio is your risk allocation and risk management. That how you manage your risk so the investor who manages his risk well ends up making a good return too.

Other than this, in your portfolio, there should be an emergency cash fund. You should have some spare cash so that in case of emergency, you can withdraw cash from there and this money should always be invested in safe assets .Say if there is an emergency and the whole market is trading down so you might have to panic and end up selling off your good assets at a low price cause you don’t have an emergency fund. And if you have an emergency fund, then you might not have to sell off your stocks, mutual funds or any other assets at a time when it is trading down. So with taking care of these things, make a good portfolio.If you make a good portfolio, then you might be able to make a good return.

 

 

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