How to build your portfolio?

How to build your portfolio?

Disclaimer: This article is purely for educational purposes and in no way be considered a recommendation in any form. 

While you have insured yourself against any unforeseen circumstances, and have inculcated the habit of saving money every month by avoiding discretionary expenses and learned compounding, you are now ready to build your portfolio. In case you have not gone through the previous articles, I will request you to go through them before reading the current one. (https://stocksgurukul.blogspot.com)

A portfolio is nothing but, a group of financial assets. If you take my example, I am holding my funds in Bonds, Debentures, Equities, Gold, etc. So, the question here is why am I diversifying and putting my money in different assets? The simple answer is to diversify the risk. 

Take an example of Stock Market Crash in 2008 (although it recovered later), if someone would have invested 100% of their money in equities, then the portfolio would have been down by larger chunk as there was not enough diversification. 

Then, how to diversify risk? Well, this is an answer which varies from individual to individual. There is a common rule in the Market - That whatever your age, subtract it from 100 and the result is the maximum percentage of equities one should hold in their portfolio.

For instance, for a 20-year-old, the maximum percentage of money invested in equities should be 100-20=80%. For a 60-year-old, this number would be 40% (100 less 60).

Again, I am reiterating that this is not a hard and fast rule and it all depends on the personality of an individual, goals to be achieved in life among other factors. 

Take another example of a government employee having two daughters, both about to enter school. His goal would be to generate enough returns for his daughters’ college education along with their marriage. So, he decides to invest more in fixed income securities - FDs, PPF, NPS, Saving Schemes, Debentures, Bonds, etc as he can not afford to lose money in event of any particular asset crashing down. 

The first thing before designing your portfolio is - GOAL. One should sit with a pen and paper and give one hour every week to lay down the goals you desire to achieve at 50/60/post-retirement. It can be 5 crores, 10 crores or much more. Someone might be having a home loan/car loan etc. List down all your assets and liabilities you have till now. And the expenditures you are assuming in the upcoming years of your life. They can be marriage of children, education, vacations, buying a home or living a peaceful life with all the money. 

Once you have written down your goal, you must review it at least every month or a year. Now, after having a goal back in your mind, you must calculate the returns needed to achieve that goal. For instance, if I have a goal of 100 crores, I simply can not achieve it by investing 5,000 per month. So, now you need to understand the assets you will own in your portfolio to achieve that goal and the percentage of it.

If you ask me, I invest 70% of my money in equities (50% of it in stocks and rest 20% in Mutual funds), 20% in debt through NPS and Bonds/Debentures, and the remaining 10% in Gold. It is very important for you to understand your own personality before designing a portfolio. Are you the person who becomes anxious as your stock is down by 10% or are you likely to be emotionally depressed if you lose 20-25% of it. Then, you should feel more comfortable holding fixed income securities. 

The second step is to take out at least six months of your total income aside for building an emergency fund which should be in a liquid form (means it is with you immediately when you need it) for any unforeseen circumstances.

The third step is to allocate the percentage of your money to properly diversify your portfolio. For a 60-year-old, the debt part will be higher and for a young soul in 20s, equity will play a major role (reiterating depending on your personality style).

The fourth step is to understand inflation and how it will impact your returns. Take an example, Mr. X gets a 3% return on the money kept in Savings bank account. So his 100/- becomes 103/- next year, however, he neglected inflation which is 4%. So the same thing which costs 100/- is now worth 104/-. Simply, out of the reach from the money generated. 

So, a savings account will not help you to achieve your goals. There are multiple other options available which are as follows:

• FDs - Return in the range of 6-7% p.a. (Inflation needs to be kept in mind)
• PPF with a 15 year lock-in period and return of 8% p.a. (average and fixed)
• Mutual Funds - you can expect 12-15% return realistically in the long term, however, it is not fixed
• Stocks - Depends on the businesses you hold (will be discussed in later articles)
• Gold - With schemes like Sovereign gold Bonds, ETFs gaining popularity, gold is a safe haven during the time of any bear run in the market. (Will also be covered in later Articles).

Just to sum up everything, I am listing all the points for an easy understanding:

• Write down your Goal,
• Calculate the realistic interest needed to achieve that goal,
• Understand your personality style,
• Keep aside at least 6 months of your income for an emergency fund,
• Divide your money into various assets - Fixed Income securities like FDs, PPF, NPS, Savings Schemes, Bonds, Debentures and Floating Income Securities like Mutual Funds, ETFs, Stocks, Index Funds, etc, 
• Let the money grow by letting compounding to work in your portfolio. :)
• Lastly, constantly monitor your portfolio and review it at least once in a month by maintaining an excel sheet or paper pen and listing all your assets and liabilities. 

In the next articles, I won’t be touching fixed income securities and I will only focus on the domain of stocks. In case you have any queries, kindly feel free to write in the comments section. :) Thanks for your valuable time.

Happy Investing….!!! :)