What can help you build a profitable portfolio and contain losses? - Part 1

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Every individual in this world strives to achieve his financial goals. Stocks markets, with the reputation of being the best wealth-creating assets class across the world, holds appeals for millions of investors. And those numbers have seen a quantum leap since the pandemic. From 2018-19 the number of demat accounts more than doubled from 3.6 crore to 7.4 crore by November 2021 stands testimony to this increasing appeal. Although investors enter the market with the idea of creating wealth for the long term, the taste of big gains in small periods can end up making investors greedy that invariably ends up in destroying wealth rather than creating.

Rising markets have a tendency to deceive investors into believing that the rally in stock markets will continue for ever. But nothing can be far from the truth for stock markets returns are exceptionally lumpy, with years of phenomenal returns often followed by serious crashes or years of muted returns.

As the resilience of the markets gets tested this year with several headwinds in the horizon like the tightening of interest rates by the US Fed and geo-political tensions, investors have to revisit the basics and ask hard questions about their long term objectives and strategy; and the individual stocks they are investing in. In a two part series, Moneycontrol equips you with the right questions that can help you stay on course.

Part 1

Questions that an investor should always be asking himself to maintain a profitable portfolio, take a look.

So, what does it take to achieve a balanced and profitable investment portfolio? The exercise of building an investment portfolio can intimidate the best of brains but there are certain very pertinent questions which, if an investor keeps asking / checking at regular intervals, he is bound to emerge as a winner – a successful investor who will surely fulfil his financial goals.

First and foremost, before anyone embarks on his financial / investment journey, it is of profound importance that one should clearly identify his investment goals.

Ashish Gumashta, Chief Executive Officer, Julius Baer (an international wealth management company) suggests that, “It doesn’t matter if you’re new to the stock markets or an expert; it’s important to determine where you stand with your investments and how to make your investments work for you”. This will be possible if there is a clear goal in place and the purpose of investing.

“The purpose of investing will determine what kind of asset class you chose and the period of investment also”, said Manish Jain, Fund Manager, Ambit Asset Management. More than the return expectations, what is important to ask is: Why am I investing this money? Is it spare liquidity? Do I need the money for a specific purpose like my Child's education, marriage, retirement fund?

The second most important question that an investor should check is about his risk profile i.e. his risk appetite, how much risk he is willing to undertake.

“This is the most fundamental question that one can ask and is central to portfolio construction”, said Jain.

Risk appetite of an individual will determine if one would invest in Gold, bank term deposits and tax-free bonds or equities, PE funds, long-short AIF's (alternative investment funds).

Talking about risk appetite, Rajesh Saluja, Chief Executive Officer & Managing Director, ASK Wealth Advisors advises investors to check at regular intervals, “If asset allocation between equity and debt is in line with long term financial goals / return expectations as it helps in keeping discipline and risk at check and also helps move allocation from debt to equity when equity corrects and equity allocation falls and vice versa”

Risk appetite will also determine the investment duration and return expectations. So, invariably this becomes the starting point of any investment journey.

“Take the time to find your personal risk profile as it (amongst many other important aspects) gives you the best guidance on your return expectations”, said Gumashta.

It is equally important to compare the performance of one’s portfolio with one that has a similar risk profile. How does each scheme fare on performance vis a vis benchmarks and peers on 2-3 year periods.

“This should be rolling performance tracked quarter on quarter to remove point to point dispersions/biases”, added Saluja.

What is your investment horizon? This is another very important question that needs to be ascertained to make any financial journey fruitful.

The investment horizon is a crucial factor for determining the appropriate investment strategy. “We encourage you to opt for long investment horizons with review of portfolio at regular (quarterly) intervals but very frequent review of portfolio is not advisable”, added Gumashta of Julius Baer.

Once an investor knows his goals, time horizon and risk profile, he must then plan his investment approach.

“Typically we advice core-satellite approach, which involves having a core asset allocation with a strategy you truly believe in and then add ‘satellites’ which could be a special focus on an exotic theme, more volatile stocks, or perhaps an options strategy”, suggested Gumashta.

The core strategy should remain in place for long term, while the satellites can be short-term investments that allow advantage of opportunities as they arise in the market.

Also in current markets a 10 percent cash reserve should be kept to invest in extreme corrections. If the market witnesses any major correction, that can be considered as good investment in equity markets.

“It is difficult to time the market and hence one should do investment considering long term targets. Short term volatility should not unnerve the investors”, said Amit Gupta, Vice President and Fund Manager - ICICI Securities PMS.

Staggered investment is definitely a good way of investing which can reduce the cost of holding when market declines, Gupta added. Part of the lumpsum investment can be used when any major correction comes.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.