With the right outlook and approach, building wealth can be one of the most gratifying and pleasing experiences in an investor's life. Every investor dreams of building a profitable investment portfolio. However, the question arises, what is portfolio investment? Portfolio investment is a strategy that covers financial goals and mitigates all possible risks. Understandably, it's an uphill task. You will need to set up your financial goals, understand your risk appetite, decide allocations and accordingly pick the right investments. But it is not over yet. Investing prudently also calls to have your ear on the ground, make sense of market information and discern the news to make it work for you. Through investment analysis and portfolio management you can track your investments as you keep building wealth.
Keys for Successful Investing
To evolve as a successful investor, it’s essential to keep an eagle eye on key changes in the market and know how stock market reacts to key economic data. Equity markets are highly susceptible to market changes and actively react to various political and economic changes. Let’s take two major events to understand this.
- Example 1: The Government’s decision to demonetize currency at the end of 2016 had a massive impact on the stock market. Demonetisation resulted in withdrawal of nearly 86% of circulated money in the market. This led to the BSE Sensex’s immediate and huge crash by 1690 points. Some of the sectoral indices of cash-driven sectors such as realty and consumer durables also witnessed a tremendous plunge.
- Example 2: In 2017, the passing of the GST bill had a similar impact on the stock market. The Government’s decision to keep the tax rate low on mass consumption items and exemption of tax on cereals, milk and grains worked positively for FMCG stocks such as Nestle and Marico. Likewise, it had varied impact on various sectors.
In order to make sense of market volatility, investors need to consider various data points such as inflation, GDP trends, global changes and the economy as a whole. The Higher the GDP, greater is the level of income and spending, which ultimately results in higher corporate earnings. Market sentiments vary with such data changes.
Making a smart move
Apart from the bigger picture, some specific elements mentioned below can be taken into account before investing:
- Corporate earnings: Being aware of what is happening in the company whose scrips you hold can help you make a rational decision. Company quarterly reports representing earnings provides a broader picture of the company’s progress towards its targeted annual growth. Along with net profit it is important to pay attention to other details like debt structure, earnings per share, net sales and operating expenses etc. However, analysing these numbers can sometimes, be, easier said than done.
- Analyst ratings: Stock ratings by industry analysts give a measure of the stock’s expected performance for a particular period. Ratings are sometimes simply labelled as ‘buy, ‘hold’ or ‘sell’. Sometimes, ratings are given as ’equal-weight’ ’under-weight’,‘ ‘outperform’’ and ’underperform’. These ratings are assigned based on various valuations, market trends, competitive advantages, company’s earnings, prospects and other factors. It is worthwhile to consider such informed opinions.
Smart decisions always needs smart skills. Some skills required to make sense of news and use it for portfolio success include:
- Critical thinking: Strong critical thinking is important to make SWOT (Strength, Weakness, Opportunities and Threats) analysis of financial reports.
- Anticipate: Evaluating possible impact of major events and its effect on the financial market is important in making smart investment decisions.
- Outside the box research: Being mindful of various scenarios and being able to associate their possible impact on various market activities is crucial.
- Competitiveness: It is required to stay innovative and tap good opportunities.
Every investment decision needs extensive research and a constant check on the financial market. Being informed on market developments and analysing them is highly crucial in making a smart move.
Thus, it is advisable to avail professional help. You could use the services of a stock portfolio manager to guide you in how to create an investment portfolio. Portfolio management services offer a customised portfolio investment process strategized and managed by experts or portfolio managers.
The bottom line to building a successful investment portfolio is to make sense of the news, interpret data while analysing events and predicting every possible outcome. Portfolio managers help build a successful and customised investment portfolio with their knowledge, skill and strategy. Make use of their expertise and proficiency in navigating your financial future and pursuing your investment goals.
Risk is inevitable and natural. It affects every investment decision you make as an investor. There is no solution to escape investment risks. Your best hope is to manage risk effectively. What is a risk assessment? Well-managed risk is beneficial in the long run, as risk and return go hand in hand. Hence, risk measurement is a kind of risk assessment procedure which is the first step towards making a wise investment decision and building a well-managed investment portfolio. Let’s understand the types of risk assessment.Types of RiskRisk can be of two types:- Qualitative risk- Quantitative risk Qualitative riskThis type of risk is based on these factors: Financial goals Time horizon Risk tolerance capacity The risk of the investment itself How to do a risk assessment? The nature of the investment and its historical performance need to be considered in order to analyse the risk. This can help you compare different investments too. For instance, you have two investments. The investment that has steadily given you a return of 10% year on year is considered less volatile and risky. On the other hand, the second investment gives fluctuating returns, 14% one year, 4% the next year and 10% hereafter. Here, the second investment is considered volatile and a high risk investment option. Quantitative risk assessmentBesides qualitative approach, risk can also be quantified using analytical tools. Thus, in quantitative risk management, risk is calculated on the basis of certain formulae. Some of them are:• Standard deviationIt’s a commonly used statistical tool for measuring risk. Basically, standard deviation is used as a measure of volatility in stocks, stock portfolios and mutual funds. This number indicates how much a particular stock/fund return has varied from its average return over a number of years. An investment is considered risky if its return deviates more from historical averages. For example, stock A and B have given an average return of 10% for last 5 years. But stock A is more risky than stock B as its standard deviation is more and the stock is highly volatile. Let’s take a look at the performance comparison of the above table in a graphical manner below. The standard deviation graph suggests that stock A is prone to fluctuations as compared to stock B. Alpha Alpha measures investment performance on a risk-adjusted basis. Basically, Alpha means the excess return for any investment as compared to its benchmark performance, thus keeping the risk under adjustments. Therefore, Alpha of more than 1.0 implies that an investment has outperformed its benchmark and compensated more than that of the risk taken. Beta Beta gives an idea of historical volatility. It is used to measure how a stock or a portfolio moves in comparison to benchmark index. For example, beta 2 implies that a particular asset is twice as volatile as the benchmark. Beta shows how sensitive an asset is to market movements. R-squared R-squared helps you gauge to what extent the investment portfolio movement reflects on the benchmark movement. The figure may vary from 1-100%. A higher percentage denotes good correlation between portfolio and benchmark return. Sharpe ratio Sharpe ratio is one of the widely used tools in tracking the performance of an asset. It is a risk adjusted measure of return that helps to compare two similar investments. In mutual funds, two funds are compared on the basis of Sharpe ratio. The fund having a higher Sharpe ratio is considered worthwhile. VIX (Volatility Index) VIX is a widely used measure of market risk. It was introduced in India in 2008 by the National Stock Exchange. VIX measures near-time or upcoming risk. It is based on future and options data and hence gives an approximate idea of near-time volatility expected in the market.ConclusionIn a nutshell, a correct blend of both qualitative and quantitative risk measurements is ideal for performance assessment and to construct a healthy investment portfolio. It is always good to use more than one mathematical measure to analyse risks. Risk measurement techniques are useful in evaluating the risk associated with an investment, thus helping you analyse and compare to make a smart investment decision.
Now that you have set up a robust portfolio, you begin to plan your journey towards your investment goals. With a disciplined approach, you follow a desired asset allocation (blend of stocks and bonds) that best matches your risk profile. But, what you did not anticipate is market volatility! Since markets tend to fluctuate without warning, it can cause your portfolio to veer off track. This is when you need to fit in a strategy to get it back on schedule. The entire process of doing so is called rebalancing. What is portfolio rebalancing?The process of realigning your portfolio back to target asset allocation, by buying and selling a portion of your portfolio is referred to as portfolio rebalancing.For example, you decide to invest in equity and bond equally. A year later, the equity market outperforms and you put more money in equity investment. This change may seem like a good strategy on paper but in reality, your portfolio is exposed to greater risk than before. The concept of rebalancing goes way deeper than just sticking to the original asset allocation. Rebalancing is a complex exercise and a number of factors need to be taken into consideration, such as age, income level and investment requirement. Your target asset allocation may also need to change as you age and your growing needs. The change in target asset mix also calls for rebalancing. For example, with age you may want to shift from an aggressive asset allocation strategy to a conservative asset allocation strategy. Let’s say, you are currently at pre-set asset allocation of 70% equity and 30% bonds, which has a higher exposure to risk. As you age and get closer to your retirement years, you may want to play safer with your investment, for example move to an asset mix of 40:60 equity and debt. Given your risk appetite, you may need to relook at your portfolio accordingly.Why do you need to rebalance? For active risk management When the market is on a roll, a larger stock investment may seem good. But, when the market drops unexpectedly, you are exposed to a higher risk of price drop. Thus, rebalancing your portfolio on a timely basis can help keep the risk balanced. To realign your portfolio based on your investment goals and needs Your life circumstances, overall goal and risk level tend to change over time, which calls for a rethink on your asset mix and portfolio rebalancing. The asset mix that worked for you 10 years ago, may not be appropriate for at the moment, when you maybe only a few years away from your goal. Type of portfolio rebalancing strategies Tactical rebalancing: This particular strategy is applied based on external events and market environment. Basically, it is suitable for active investors who keenly follow the market. Periodic rebalancing: A systematic application of periodic rebalancing is helpful in reviewing the portfolio on regular basis and can be rebalanced if necessary. You can define a percentage of deviation to trigger rebalancing. For example, your original asset allocation is 60% equity and 40% debt with a deviation of 5%. Rebalancing will trigger only when the equity exposure shoots up to 65% or comes below 55%. A well-diversified portfolio includes various assets (stocks, bonds, gold and cash etc.) with different risk and return characteristics. A diversified portfolio also includes assets with differing correlation that do not move in the same direction during change in market condition. Thus, rebalancing a portfolio allows investors to capture the gain during market volatility with these uncorrelated assets. For example, gold and equity have an inverse relationship. When gold prices rise, stock prices tend to go down and vice versa. Thus, it is important to look at the market condition while rebalancing your portfolio.. Rebalancing may also involve costs such as tax and other transaction fees. Hence, rebalancing is a complex process that depends on various other factors like fluctuating market conditions, shift in financial circumstances, lifestyle changes and costs involved. Seeking expert help can benefit in managing risk professionally along with generating returns for your desired goal.ConclusionPortfolio rebalancing will depend on your risk/return profile. Ultimately, it is an important risk control tool that will help you to stick to your investment plan and goals regardless of market conditions changes.
Are you Investment ready?
*All fields are mandatory