I had written this article for Yahoo Finance..long ago..read on…
Well just too many people have no rules, limits, …and have no clue on how to invest in equities. These people can, should and do lose their shirt, pants and undergarments…..and deserve it. Completely.
Let us say you are a well qualified, sensible, boy or girl and wish to invest in equities. Well if you do not want to be an active participant, you could choose a mutual fund. If you do not trust fund managers (I trust only 5 out of the 100 odd that I would have met), choose an index fund – the cheaper (and lesser tracking error too) the better.
Ok, you are a little more adventurous. You wish to invest in direct equities. Now comes the challenge.
Let us say you are 35 years and wish to create a portfolio. You are a woman, earning Rs. 8 lakhs, and ARE NOT THE PRIMARY PROVIDER of the house. So you can take a little more risk than a man, WHO IS THE PRIMARY PROVIDER.
So let us say you have Rs. 10 lakhs to invest, and influenced by this site, you decide to put Rs. 8 lakhs in equities.
Rule No.1: NOT more than 80% of the SECONDARY earner’s portfolio will be in equities.
Rule No. 2: NOT more than 5% will be invested in ONE Company, as an initial investment. In case the share does well, we will LET it go up to 25% of one’s EQUITY portfolio. Anything in excess will be constantly sold off.
Let us say you are able to add Rs. 20,000 to the equity portfolio every month, and this share is also going up every month, it will take a real long time to breach the upper limit (unless you have picked one diamond and all other duds!).
Rule No. 3: Industry diversification I will learn or copy from good fund manager’s portfolios, and I will buy only in group A, or B1. I will NOT touch a share in group B2, or T2T….even if Subramoney.com says these are future blue-chips.
Rule No. 4: I will keep a 25% trailing stop loss. Let me explain. You have bought Rs. 40,000 worth of Carborundum Universal (my examples are obviously from my portfolio, and my cost of this share is Rs. 3.59 per share, thanks to split and bonus, so if you want to copy me, go to 1990, or create your own portfolio). Suddenly the shares value falls to Rs. 30,000. You will do nothing. However on the day it falls below 30k, YOU WILL SELL. Knowing how to cut losses is as important as knowing how to let profits run.
Rule No. 5: I will review my portfolio on a quarterly basis. I HAVE NO business managing my own portfolio UNLESS I can beat the index. Clearly if you beat the index for one year, then second year, then 3rd year…you are doing well. If you do not beat it for the first 4 quarters – and are trailing by a huge margin, sell and go to a good fund house.
Now tell me with all these rules in place how much can you lose?
Rs. 800,000 is the total investment, Rs. 40,000 is the maximum exposure to one stock, 25% is the trailing stop loss- so you can lose about Rs. 10,000.
Your liquid net-worth is Rs. 10,00,000.
My dear girl, you can lose about 1% of your net-worth. Neither you nor your husband should lose sleep over this.
Once you get confident, take charge of your husband’s portfolio…and make sure that you invest about 60% of his portfolio – the other portion being in bonds, pf, ppf, some stupid lic policies, …and other debt instruments.
While calculating IGNORE your primary residence, and the loan that you have against it. Cars, golf kit, Asics, Adidas, Nike, Reebok, gold jewelry, Garmin 910, Trek mtb, Canondale Road bike are all expensive, but sorry they are expenses, NOT assets.
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