Chapter 4: Process or How the heck do I Invest in Equity Successfully?

4.8 Manage your portfolio like a fish tank


How do you manage your portfolio to earn the expected returns while managing risk? How do you ensure it is meaningfully diversified across asset classes and across different categories of stocks? When do you sell a stock in your portfolio? How much, how quickly? How and when do you rebalance your portfolio? How do you provide for goals during different market conditions without losing on returns? What can managing a fish-tank teach you about managing your portfolio effectively? 
 
I know you have spent a lot of time and energy in reading this book. Everything we have learnt to do and I hope you have started doing it, is about investing your money and building a portfolio. But to earn the expected returns you also need to manage your portfolio effectively. It’s not a buy it and forget it game.  Equally it is not a watch-the-price-ticker-and-react game. What you will see in this chapter is the process to manage your portfolio to get results without anxiety. 
 
In fact, everything you have learnt in this section is towards ensuring you do things that don’t create anxiety – invest only in very good quality stocks at reasonable prices and build your portfolio with Core and Booster stocks to have stability and steady compounding combined with the possibility of earning enhanced returns. With this you would have done many things right. So, what remains is managing your portfolio. What does this mean exactly? 
 
I don’t know if you have ever had a fish tank, if you did you will understand the huge similarities managing a fish tank has with managing a portfolio right away. If you’ve never had fish tank, you will still get it. 
 
Having a Fish Tank or aquarium at home is the 3rd most popular pet after dogs and cats in USA and has similar stress-reducing benefits. That’s why they are very often found in hospitals, doctors and dental clinics. But I am not promoting this pet or pet industry here, so let me jump straight into what it teaches about managing a portfolio. 
 
Lesson #1: A Fish Tank is an ecosystem where fishes can live and thrive. Your portfolio is the tank and stocks are the fishes. I want you to remember that the goal, the objective of your portfolio is to ensure your stocks grow and thrive because that’s what leads to earning inflation beating returns and reaching your financial goals. 
 
Lesson #2: The tank is designed and built so that it never leaks.  In the same way, your portfolio is not something you use like your saving accounts, withdrawing money whenever you need it. The money that is in your portfolio is not to be touched, no, not even during emergencies for which you have your emergency fund and health insurance. It is to be used to fund your goals. This ensures your investments get the time to compound without any break whatsoever. That’s what creates the magic
 
Lesson #3:   Fishes cannot survive without water. Debt or Fixed Income investment is the water. It’s not interesting but no portfolio can survive with this. The long-term health of your Fish Tank ecosystem depends on the having the right balance between the water and the number of fishes that it can support. This is the asset allocation that you need to have and maintain. Too little water and too many fishes will lead to some or all of the fishes dying due to lack of oxygen. Too few fishes make the fish tank less attractive, unlikely to give you the joy and satisfaction of having maintained a fish tank. And without fishes you have a water tank and not a fish tank.
 
Lesson #4: Having different kinds of fishes ensures the fish tank is interesting, fully utilized and sustainable. 
 
 
One the first things that you learn when you start a fish tank is that different fishes prefer to swim at different levels............Read More

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