Diversification will help in minimising losses, but one should not invest more than 20% in a sector: Shankar Sharma

Making money through proper strategy and proper asset allocation in a portfolio is always a big task. And in the situation like the COVID-19-led fall, when the portfolios lost 30-40 percent of their capital, it always makes sense to follow some strict rules which can not only save your capital but also minimise your losses.

Shankar Sharma and Devina Mehra of First Global explained their four rules strategy for everyone's investment/portfolios.

While talking to CNBC-TV18, Shankar Sharma said asset allocation is the first rule.

"One should not be overexposed to any particular sector or segment or stock. Stick to your investment pie chart which includes all asset classes to some extent which can support your money and portfolio as something will save you from making losses in the overall portfolio. Wealth is like your health where you have to maintain your body, lifestyle," he explained.

Devina Mehra said risk management and strict stop loss are other two rules which have to be followed.

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Shankar Sharma

Director & Chief Trading Strategist|First Global

"Risk management has to be the backdrop of investment, has to be on the first page of every stock market book. You have to protect your capital, put strict stop loss because that will support your portfolio or asset class from making a loss," she detailed.

If your portfolio is down 30 percent, then it has to be up 50 percent to make breakeven levels or to get capital back to square which can take years, she said.

Hence risk management involves strict stop loss, proper asset allocation, she believes. "... no point in holding on to same stocks which are facing losses, so cut your losses. Don't fall in love with your favourite stocks. Cut losses, sit back, relax and relook at investment again."

One should own hard stocks as there can't be surety of same stocks which rallied sharply in last bull rally will be back in limelight again, she advised.

Shankar Sharma said the rules strict stop loss and risk management have to go hand in hand.

"One should not do mismanagement of stocks, you should do strong portfolio construction where the investment should not be more than 5 percent in any particular stock as even if the stock falls 20 percent you lose only 1 percent of your portfolio. Also one should not own more than 20 percent of your portfolio in a single sector," he explained.

They said diversification is the last rule to follow.

"Having a diversified asset class cushions the downturn in any one asset class and the bear market in one asset class might create a bull market in another. If one saves money in the fall, then his/her's starting next year would be far ahead of other people who lost money," Shankar Sharma detailed.

Devina Mehra said one should also have global diversification in his/her portfolio because if you checked 2019 or year-to-date performance, India has been the worst-performing market globally.

"We are really hugging the bottom of the table. Over the longer term, if someone invests only in India, the single asset class equity despite looking at Dollex is not a good investment strategy. About 90 percent return comes through proper asset allocation. When one diversifies beyond a single country, it has to be done with professionals to get an idea of asset allocation, sectoral funds, ETFs," she explained.

Implementation of these four rules is very important, in fact, it is an investment piechart and all these four rules have to be tie into each other to get proper results from the portfolio and it is the single broad framework to form investment strategy and create wealth, Shankar Sharma believes.

He feels in the next one year, same sectors of the past may not be leaders once again. "So I don't see financials will come back to some extent. You will not make big money into financials."

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