• Aditya Battu

Designing a healthy portfolio of stocks for maximum returns


A. WHY IS THIS NECESSARY?

When I first started investing 7-8 months back, I have been trying to rotate stocks in my portfolio in order to find that right balance of stocks to achieve maximum returns

Each day I used to play “catch me if you can” with stocks, trying to run behind stocks which are trending, without a clear strategy in place. The result being, I ended up making losses every month

But, as they say, you only learn by making your hands dirty. I took a pause, reworked, and now have been trying to follow a strategy which has worked well for me for the past few months, that I’ll be sharing with you in this post


Again, if you already have a strategy that is working for you, that's great. But if you don't have one currently or keep juggling between stocks, this could be of some help to you




B. FEW THINGS TO KEEP IN MIND BEFORE INVESTING

Before discussing the strategy, I want to reiterate the fact that if you want to be a successful investor, there are 2 things that are extremely important:


  1. PATIENCE

  2. STRATEGY


Do not panic and try to sell when you see the price going down. What you will end up doing is try to sell when the stock is falling and again buy when its rising, ending up making losses. If you have done your research well and have a strategy in place, there is nothing to worry about


Don't let your emotions take charge of you instead of your research and company fundamentals




C. THE STRATEGY

Now let’s dive into the strategy part. There are usually 2 things to keep in mind while choosing your optimum portfolio of stocks:





C.1. Let’s talk about choosing sector based on ECONOMY

We are often confused as to which sector should we invest in. Some say chemicals have a bright future and some say banks have a bright future, but who is right?


Should we think about future or should we take advantage of the present? I'd say BOTH.


Let me explain


To begin with, lets divide all the sectors of economy into 4 buckets based on the sector's performance as compared to Sensex:

  • Very High – High

  • High – Medium

  • Medium – Low

  • Low – Very Low


The way we have bucketed the sectors in the above categories is by comparing the performance of stock indices of all the sectors relative to the performance of Sensex


We have used NIFTY/BSE sector indices and wherever the NIFTY/BSE index for the sector is not present, we have taken stock prices of few companies from the sector to arrive at the index for that sector


In the pic below, we have tried to show the 4 buckets for June as well as July below. If we assume Sensex's performance as average, any sectors above Sensex are the ones which are outperforming Sensex due to favourable factors in the economy and the ones below Sensex are underperforming due to challenges faced in the current economic scenario




Once you have this chart, there are 2 things that you could do:


1. Allocate your stocks into each of these buckets in the proportion you are comfortable with

For a healthy portfolio, you need to have some presence in each of these buckets to ensure you are taking advantage of the present economic scenario as well as taking advantage of the ones which are under-performing now, but have the potential to outperform in the future


I have chosen 40% (Very high) - 30% - 20% -10% (Very low) as the percentages in each bucket to begin with. You can tweak these percentages based on your preference


2. Keep a track of this chart every month / quarter


The second thing you must ensure is that the sector you have chosen in each bucket should always move up the ladder / remain constant but should not slide downwards considerably. To keep a track of this, we will be publishing this chart at the end of every month, along with the future outlook for each of these sectors, in the "Know your sector" section of this website



C.2. Now let’s talk about choosing a COMPANY in each of these sectors


Based on your risk appetite, you can choose the companies for your portfolio according to the matrix below:


In the above framework we have given the examples of private banks for easy understanding. You can choose to play in the category of your choice based on your risk appetite


In the future posts, we will discuss stocks from each of these categories in detail, in the "Discover stocks" section of this website




D. ENDING NOTES


I hope you have now understood a strategy that you can follow while choosing stocks and sectors for building your portfolio


You can keep checking the "Discover stocks" section in this website to choose stocks based on your risk appetite and the sector report in "Know you sector" section, which will be published at the end of every month, to keep a track of the sector performance



Do let us know if you have any questions/comments. Also if you have any other strategy that is working for you and would like to share with our readers, do contact us

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