The word Portfolio is very common in the financial markets. We hear investors talking about portfolio and its constituents all the time. Let us have an understanding of what a portfolio is and how to have a stunning portfolio. Going by terminology, a portfolio is essentially an aggregation of the financial assets that is owned by an individual. It may have stocks, bonds, commodities and any other kind of financial instruments. A portfolio may also be owned by financial institutions.
Here we will only look at a portfolio which contains stocks. The discussion will be about to have a stock portfolio that outperforms the benchmark indices from time to time. Just like the performance of a cricket team depends on the team performance rather than on individual performance, a booming portfolio cannot be achieved by having a few quality names. Building a portfolio is much like building a team. Having the best of players does not make a great team, but the balance of the team which decides its performance. The role of each player should be according to the need of the team. Likewise a portfolio should be made of stocks which give a good balance to the portfolio, which can performance under all conditions.
Here are some features of a quality portfolio:
1. A portfolio should have a time horizon
Many investors do not have a clear understanding of investing or trading. An investment portfolio aims at getting medium to long term benefits while the trading portfolio aims to give returns in spans of days or weeks. It is a good idea to a have 2 separate portfolios - one for investment and one for trading. Using two different trading accounts can help a lot in achieving this objective.
2. A good strategy
A portfolio must be built according to a strategy. The stocks in the portfolio should fit into the strategy. For example, when building a long term portfolio, the long term prospects of the portfolio should be analysed. A portfolio can be built as per a theme. It may focus only on the stocks of a particular sector which which would see good prospects in the future. From time to time, the portfolio should be analyzed to see that the stocks are playing as per the strategy. If not, then the stocks should be shuffled.
3. Cut down losers and add runners
It has been seen that investors have a general tendency of holding on loss making stocks and booking out on profitable stocks with minor profits. As such loses keep mounting while profits get locked down. It is advisable to cut down the loss making stocks as they are seen as weak investments. On the other hand, the weightage of profit making stock should be kept on increasing. The use of trailing stop loss can help in making this work as it would eliminate the bad positions and retain the good positions. Averaging profits can help to increase positions in profit making stocks.
4. Have Diversity
Investments should be distributed across a wide range of stocks to have variation. This would allow over dependency on a single stock which may lead to huge losses in case the stock faces huge declines. Such shocks can be averted by having a wide range of stocks across sectors and companies which add balance to the portfolio. On the other hand, too much of diversification creates confusion. The investor ends up in buying too many stocks and is not able to track them properly.
5. Cash- Carrying strategy
Cash should also be considered as a form of asset. Investors should choose to stay in case when situations are unfavorable. Cash helps the investor to avoid losing money in poor market conditions. Staying in cash is better than losing money by taking wrong trades which can result in losses. An investor should switch his investment in equity and cash, according to the market scenario. In risky situation there should be more of allocation in cash than stocks while in rewarding situation the allocation in stock should be high.
6. Regular investing
The best way to build a portfolio, especially long term portfolio is to follow a systemic investment plan where there is regular investment. Rather than investing the entire sum of investment in one go the investor can keep adding the stocks at regular intervals. In this investment pattern the investor is able to buy a stock in a wide range of prices. Here again, one should add to the profit making position and not engage in averaging out losses. The investor thus buys good stocks and does not keep building positions in weaker counters.
7. Monitor performance
Just like the performance of mutual funds is measured by comparing their performance relative to the benchmark indices, the performance of a portfolio should also be measured so as to see whether it is performing well. The returns of the portfolio should be compared to the performance of the benchmark indices over a particular time frame to get a good measure of how the portfolio is doing.
8. No profit booking on Time
Just like life, there has to be a satisfaction level in stock markets. When stock prices go up, investors should not get carried by the more greed and hesitate from booking profits. Profit booking or at least partial profit booking on opportunities is extremely important. As situations change in markets, there may be a sudden change of fortunes due to some news regarding the company and profits may get wiped out. However, here again one should have a logical and clear thinking about when to book out of stocks.