In my earlier posts, I have dealt with the advantages an Individual Investor has vis a vis a professional fund manager. However, there are some challenges one face while managing a growing portfolio on his own.
Most of my friends who invest begin by putting one to five lakhs on an ad hoc basis. Let’s say they realise they have some spare cash and want to buy Tata Motors because it’s down a bit too much. So they put in money and buy whatever number of shares they can, generally to the nearest round figure. Next month, they buy another stock for similar reason.in this manner, over a period of time, they end up owning six to ten stocks with no defined strategy in place except- अच्छा लगा, ले लिया। For a very small amount of money, there is no value in digging up portfolio weights for each stock or worrying about the case when IOC is 40% of your holdings.
However, once you get the discipline to put in more money to work regularly, you’re at times not sure what to buy and how much to buy. Hence, I am sharing my own approach to solve this puzzle.
Let’s say today your portfolio has close to 10 stocks and is worth Rs. 10 lakh. If you divide market value of each stock to the overall portfolio size, you’ll get weightage of each stock in the portfolio. This will help you to know if you’re owning too much or too little of a stock to your liking. My thumb rule is having less than 5% of my portfolio in a stock is meaningless. I don’t want to research a stock, dig up financial statements, spend time analysing it’s prospects and make it 1% of my portfolio because even if it doubles, it won’t make much difference to the overall portfolio. Like I said earlier, the biggest mistake is committed after doing the hard work and buying Ten shares of Reliance.
If you believe that the stock is worth a lot more and it will grow both in price and in value, Don’t buy ten shares, buy ten thousand shares if you can afford to. Once you’ve zeroed in on a stock, owning a thousand shares is much better than owning hundred shares. Unless you put in your money with conviction, you won’t make big money. The stock may move from 100 to 500 in one year and we all made 400%. However, someone owning 100 shares will only make 40000 while the other guy who owned 1000 shares will make 4,00,000/-. This is the difference between being a small Investor today and remaining a small Investor forever.
Coming back to our portfolio sizing. Once you’ve identified the stock weights for your current portfolio, you now want to put additional money to work. In this case, project a likely size of your portfolio two years from now. You may say, by the end of 2022, I’d be putting in another 15 lakhs in stocks. So your likely size in two years will be 25 lakh from 10 lakh currently. Now ask yourself a question. Are you happy with the stocks which you own now in the same weightage as today or do you want to change something about it. Let’s say you own 2lakhs worth of ITC. It’s 20% of your portfolio today but if you don’t add anymore, it will be 8% two years later. So if you think you want ITC to be close to 15% of your future portfolio, you should buy 1.75 lakh worth of ITC more.
In the same vein, there might be a stock worth 30/40/50k in your portfolio today. You bought this without any thought and it’s languishing in your demat eversince. Currently, it’s 3-5% of your portfolio but if you don’t want to add to it, it will be 1-2% of your future portfolio. In that case, all it’s doing is to block your capital as we have already seen owning so little won’t move the needle much. In that case, it’s best to sell it today and use that money to buy more of what you’d want to keep two years from now. You might say, of its down 10%, how will I sell! My answer to that is, by not selling today, you’re wasting the remaining 90% capital which you can grow over time in some better stock. Also, booking a loss will help you in two ways. One, you’ll never buy just like that. You’ll be more careful in what and how much you’re buying. Two, you can square off capital loss with future capital gains and avoid paying tax.
So, next time you’ve some free time, do this exercise for an hour or two. You’ll learn a lot about the way your money is being put to work. Also, when the next time Nifty is down 500 points and you’ve money to buy, you’d know exactly what and how much to buy. Remember, you’re the fund manager of your own money!
Life is all about Compounding! 