how to build an ideal portfolio?

How to build an ideal portfolio?

An ideal portfolio should have exposure to different asset classes
like Gold, Property, Insurance, Providend Fund, Bank deposits besides
equities. It should be well-diversified so that you are saved from the
ups and downs in one asset class but not over-diversified as it kills
the returns of a portfolio over time. This can be implemented by
having:

• Not more then 15-20 well-researched stocks. This can be achieved by
allocating a minimum of 5% and maximum of 10% to a particular stock.

• Not less then 5 sectors and not more then 8 sectors. This can be
achieved by allocating a minimum of 10% and maximum of 20% to a
particular sector.

• A judicious combination of large caps and mid caps depending on the
risk profile (A recommendation is 60:40 )

• Small cap/Speculative stocks exposure between 0-5%. An investment in
such stocks is like drinking, if it cannot be avoided altogether then
it should be done occasionally and in limited quantity.

• Allocation to value, growth, and momentum stocks in descending order
(A recommendation is 60:30:10). A brief description of each is :

Value stock- A stock for which market price is much less then the
intrinsic value and hence it is undervalued.

Growth stock-A stock that has strong earnings currently and it is
already factored in the price. Investors expect the company to
perform strongly in future too (Example is Capital goods sector)

Momentum stock-A stock that goes up purely based on rumours,
speculation, manipulation and market price is not justified by the
fundamentals of the company (Example is RNRL)

A value stock can turn into a growth stock and then momentum stock
later.

• 10%-20% of allocation to contrarian themes which are out of favour
of the market presently.

• Some cash most of the times especially when you feel markets have
peaked (A recommendation is 5-20%) to take advantage of good
opportunities in near future. A higher percentage is not recommended
as you might sell your potential multibaggers too early or you might
be wrong too about the direction of the markets.

• Not more then 1-2 companies from the same sector and catering to the
same market segment (Example is ABB, BHEL and Siemens)

• More number of winners then losers. If this is not true then may be
there is a need to rebuild the portfolio.


Learning of the week:

An ideal portfolio built using above guidelines can deliver 20-30%
returns annually on an average during good times as well as bad times.