Just buying good companies at a discount price won’t make you a good investor. You need to learn the art of portfolio management.
Your stock portfolio won’t consist of just a single stock. You will have multiple stocks in your portfolio. When most of these stocks are performing well, then your portfolio will give you best returns.
In this post, I’m going to give you 6 portfolio management hacks that will help you to manage your stocks efficiently.
#6 Portfolio Management hacks that Every Beginner Should Know
Here are 6 best hacks that will help you manage a healthy portfolio so that you can get the maximum returns on your investments.
1. Keep some ‘Cash’ in hand
Cash in hand will give you flexibilities to act on new opportunities. You should not remain fully invested in stocks (with zero liquidity) at a particular interval of time.
Let me give you an example from my personal experience that why some liquidity is important for a successful portfolio management.
During demonetisation in November 2016, the share prices of a lot of good companies were down and they were trading at a discount price. Due to the sudden announcement by the PM Modi, the whole market was bearish and just within a few weeks of demonetisation, a lot of fundamentally strong company’s share price was way below than what they deserved.
However, as this announcement was unexpected, I wasn’t ready for it.
I graduated from my college only a few months before demonetization and had invested most of the money that I get as my salary (after expenses). I didn’t have much cash in hand.
That’s why, after demonetization even though I knew that many stocks were trading at a great discount and could give amazing returns soon in future, I couldn’t buy them. As a firm believer of not investing on the borrowed money, the only option left with me was to wait for my salary.
Moreover, getting money by selling those stocks which were already in my portfolio didn’t make any sense to me. I didn’t want to sell my holdings (in the loss as the whole market was down) as I was optimistic about my stocks for the long run and was confident that those stocks will eventually make me money.
At the end of the month, I got my salary and invested it in stocks. Nevertheless, I missed many cheap stocks that could have made me a huge money just because I didn’t have much cash in hand.
Lesson: Always keep some ‘cash’ in hand. Although the cash in hand or in your savings account will not give you as much return as the invested capital, however, having some liquidity will help you to act in the cases of sudden opportunities.
2. Diversify your portfolio
You do not want just apples in your portfolio. What if suddenly whole ‘apple’ market starts to decline and no one is ready to buy those apples from your at a higher price than what you paid for. It’s better to also have oranges, grapes, guavas, lemons, watermelons etc in your portfolio.
Also read: How to create your Stock Portfolio?
Here, what I mean is that you need to have a stock portfolio with a mixture of companies from different industries. One from automobile, another from pharmaceutical, third from consumer durables, forth from banking etc. This helps you to reduce the risk if one industry goes wrong and starts underperforming. In such case, the overall effect of just one stock underperforming won’t hurt your entire portfolio.
In general, you should have 8-10 stocks in your portfolio.
Note: You should avoid both ‘under-diversification’ and ‘over-diversification’. Even over-diversification is not good for your portfolio. It kills the profits. When you have 20+ stocks in your portfolio, then even if 2-3 stocks are performing exceptionally well, still the overall effect on your entire portfolio will be quite less.
3. Monitor continuously and Re-evaluate
After buying the stocks in your portfolio, you need to keep an eagle-eye on the fundamentals of your holding stocks.
Nothing is permanent and the companies with exceptionally strong fundamentals, are capable of changing their fundamentals in future. Even a blue chip company can degrade and become a mediocre stock with time.
That’s why you need to continuously monitor the stocks in your portfolio and regularly re-evaluate your holdings (at least once every quarter).
Each company announces its quarterly results and other corporate announcements time to time. All you need to do is to keep updated with these pieces of information.
Also read: How to Monitor Your Stock Portfolio?
Further, you also need to continuously evaluate whether the reason for owning the stock is still valid. For example, let’s assume that you bought a stock XYZ when it was the leader in its industry. However, after you bought the stock, the company starts to perform poorly and begin losing its position as the market leader. Some other company starts dominating that industry now. In such case, you need to re-evaluate that whether you still want to keep that company. Can that company regain its position as a leader or will it continue to give poor results in future?
Similarly, you also need to keep track of the financials of the companies and other important ratios. For example, when you bought that stock, suppose the stocks’ PE ratio was low and it was undervalued. However, after a few years of holding, the market price has increased a lot compared to the company’s earnings. That’s why the PE ratio of that company is high now and the stock is over-valued. In such case, you again need to re-evaluate that stock to find whether the stock is still financially strong.
In short, while managing your portfolio, you need to continuously monitor the health of the stocks and re-evaluate if the situation changes.
4. Have Patience
No matter how good the stock is, if you are not patient with it, then it won’t give you great returns.
Value investing works. However, it might not work immediately. Maybe the stocks won’t perform in short-term. However, in the long term, value investing always outperforms the market.
That is why you need to have patience while you are investing in stocks. You should give your stocks a chance to grow and wait for the undervalued stocks to reach its true potential.
Sticking with the stocks in your portfolio is one of the biggest portfolio management hacks that you need to learn. Selling your stocks on short-term corrections or booking small profits won’t be of much use for the value investors.
When you have patience, then time is your friend. You just have to sit back, relax and let the power of compounding do its work.
5. Average down
One of the biggest lessons that I learnt from my experience as a value investor is that it’s impossible to time the market. You will never be able to find the exact bottom. Buying at ‘exact bottom’ and selling at the ‘exact top’ is a myth.
That’s why it makes more sense to not invest all at once but rather average down. You can purchase more stock when the stock price declines.
Overall, it’s better to average down the purchase and not invest all in ‘lump-sum’ at once (and later regret when the stock price goes down).
Note: I know that you might have read at many places that people lose money in stocks just because they try to average out and reduce their purchasing price. It’s true! If you have bought a ‘poor’ stock and start to averaging out when it starts underperforming, then you’ll definitely lose money by following this strategy. However, if you have picked good stocks, and find that stock at even a bigger discount in future, then why not to seize that opportunity and buy more. Averaging down is a great strategy if you know what you are doing.
Now, different investors follow different strategies to average down their purchase price. One of the popular theory is X/3 investing strategy, where X is the total amount that you are planning to invest. This theory states that you should invest X/3 amount in a stretched period of three times to average down the buying price.
For example, if you are planning to invest Rs 60k in a stock, then buy that stock in three steps of 20k each. By doing this, you can avoid the chances of missing any big opportunity if the price declines in the near future after you invested.
Nevertheless, as already mentioned, different investors use different averaging strategies and feel free to create one for yourself.
6. Increase your investment amount continuously
This is the last hack for successful portfolio management. Increase your investment amount continuously with time, no matter what’s the amount.
Even small investments will add up when you are investing for a long interval of time.
For example, if you get a salary raise or a bonus, then after making new (obvious) purchases of whatever you were planning for a long time, spend the remaining amount in your portfolio. Continuously increasing your investment amount will help you a lot in creating a great portfolio in the future.
Further, if possible try to automate your investment. With the facilities of net banking and online brokerages, you can easily transfer a fixed amount of money for investing each month automatically. This can also bring a disciple in your investment strategy.
Note: Even though its suggested to increase your investment amount with time, however, avoid investing money that you need in near future or the money that you borrowed. Invest only what is surplus and what you won’t be needing for the next couple of years.
Although managing your portfolio might seem a little tough, however, with the help of few simple hacks, you can manage your portfolio efficiently. Here are the top six hacks that are discussed in this post:
- Keep some liquidity (Cash in hand)
- Diversify your portfolio
- Monitor continuously and Re-evaluate
- Have Patience
- Average down
- Increase your investment amount continuously
That’s all. I hope this post is useful to you.
Please comment below if you have any doubt and want to add any other portfolio management hack. Happy Investing. Cheers!
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