Portfolio allocation made easy for investors
Every successful investor has a predefined strategy for portfolio allocation. Before they start investing in the markets, one needs to determine how many stocks they should hold according to the money they have in their portfolio.
When you consider an ideal portfolio, it should be as simple as you can make it. It would mean that you make it focused rather than investing in an extensive list of companies. You will understand more about an ideal portfolio from the below information:
Holding size in an ideal portfolio
Based on the total size of the portfolio, you holdings should ideally be as follows:
- >Rs1 lakh: 1 stock/holding
- Rs1 lakh–Rs5 lakh: 1-3 stocks/holding
- Rs5 lakh-Rs15 lakh: 1-5 stocks/holdings
- Rs15 lakh-Rs30 lakh: 1-7 stocks/holding
- <Rs30,00,000: 10-15 stocks/holding (depending on market factors)
An ideal portfolio for better profitability
An investor that maintains a focused portfolio always comes out as a successful investor.
1. Concentrated returns: It is not the number of stocks you hold but the quality of the stocks. Concentrated returns work on the theory that you hold fewer quality positions rather than unnecessarily diversifying your portfolio. For example:
Focused returns: You own a stock that goes up to 20%, making your overall returns on the portfolio at 20%.
Non-focused returns: You own 5 stocks, and one of those stocks goes up to 20%, making your overall return on the portfolio at just 4% (20/5=4).
This is a very simplified example to understand the importance of a focused portfolio. It will not matter if you hold one stock or 10 stocks. The theory of focused portfolio works on the principle that the stocks should be of superior quality irrespective of the number.
2. Lower trade commissions: A smart investor always keeps his trade costs to a bare minimum. Always go with a stock brokerage firm which charges a flat brokerage fee rather than a commission on each transaction. Commissions lower profits significantly, thus, reducing the money available for future investing.
Brokerage firms like 5Paisa charge a flat Rs10 per transaction no matter the size; this should allow an investor to increase their profits.
3. Disciplined investing: Every investor should plan to buy stocks of companies that have a growth potential. Successful investors make a list of several hundred companies before narrowing it down to the best options in the market and taking the decision to invest.
Narrowing down the list requires thorough research of a company’s financial condition and its past performance. Here, research ensures that the best possible stocks are purchased and definite profits are realized.
Role of ETFs in diversification
Exchange-traded funds are index funds that are traded just like stocks in the market. They are a basket of funds that are composed in a similar manner as indices like the BSE Sensex or S&P CNX NIFTY. Through ETFs, an investor can have a focused portfolio without having to diversify; this also helps one mitigate the risk of reducing the overall returns of his/her portfolio.
ETFs expose you to the stocks of different companies at once without having to purchase them individually. Apart from this, the overall management cost of an ETF is relatively low as compared to other investment options, i.e. less than 1%.
To make better investments in the share market and to make your portfolio perform better, you should positively consider quality over quantity. Never underestimate the power of a quality stock as it can outperform every other stock in your portfolio. If you want valuable advice on how to make your portfolio an ideal one, do visit us at 5Paisa.com.
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