An intelligent investor should know the importance of a well-diversified smart portfolio. Whether he is investing in stocks, bonds or mutual investment, he always chooses his portfolio smartly. Although most people have a different strategy for creating their portfolio, there are a few main points that should be taken care of while creating your portfolio.
A smart portfolio is the one, which maximizes the profit and minimizes the risk. The first step of creating an intelligent portfolio is ‘Diversification’.
What diversification means, in general, is to buy stocks from different sectors (Banks, autos, FMCG, energy, IT, etc) rather than buying a single or two stocks of huge amount. In short, it can be explained by the old saying- ‘Don’t put all your eggs in the same basket’.
While many people argue that, it makes a lot of sense to invest a huge sum of money on a sure-shot stock (which you are too confident about- example Microsoft, which gave 10 times or more returns). However, we like to differ from the argument.
There are various reasons we can give you to support our conclusion.
First, you never know which stock is next Microsoft. Stocks like Microsoft are only a few among more than 5000 stocks in the stock market. If by any chance you made a mistake or if by bad circumstances, the company is not able to perform as expected, and then your whole sum of money will be in vain & you may be in a tremendous loss. Second, for investing in such a company, you need to be 1000% sure. You need to do a lot of intense investment about the company (which is generally not possible for a retail investor), but if you have a diversified portfolio you can slight risks if you are confident about your other stocks.
For example, if you have 10 good stocks, you can be certain that most of them (8-9) will outperform the market and give you a good result. 1-2 bad stocks in a group of 10 will not affect your overall portfolio. However, in the case of a single stock, it is either win or lose.
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Therefore, in this post about How to create your stock portfolio, we suggest our retail investors invest in a diversified portfolio. Do not buy 1 lakh shares of just one company in your portfolio.
The advantages of a diversified portfolio:
- Diversification helps you in giving liberty to choose a variety of stock. You need to do extraordinary in all the stocks you choose. If most of the stocks are performing well, then your portfolio will overall be in profit. Like the legendary investor Warren Buffett said ‘You only have to do a very few thing right in your life so long as you don’t do too many things wrong.’
- Sometimes some sectors underperform and because of which the stock will underperform. Say, if the bank sector is not performing then your bank stock will be in loss. However, it is very less likely that all other sectors (IT, autos, FMCG etc), will also not perform at the same time. During such times, diversification can help you to remain in profit withholding the stocks of other sectors.
- Further, if because of some unpredictable reason, one of your stock is not performing well, but you are confident that it will perform well in future, you can still keep the stock on the stake of your other good-performing stocks. You just need to balance out and be overall in profit. [In undiversified case, if your stock is not performing, you will be in overall loss and which might lead you to sell that potential stock.]
Hence, form the arguments that we just put forward, you must follow the diversified portfolio in the stock investment in order to minimize your losses.
How to create a diversified stock portfolio?
Now, we will give you an example of how to create your stock portfolio using diversified portfolio strategy so that you can get an idea of how to create one.
|Stock Name||Sector||Price||No of Stocks||Investment**||% in Portfolia|
|BPCL||Oil & Gas||713.12||20||15000||21.28%|
**Investment is not just Price X (no of stocks). It also includes other charges like brokerage charge, transaction charge, STT, service charge etc.
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There are other important points in our discussion about how to create your stock portfolio, which need to be taken care while creating your portfolio, and will be discussed in subsequent posts.
Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting