Investment Shastra
5 How-do-you questions that Impact your Portfolio, a lot!
5 How-do-you questions that Impact your Portfolio, a lot!

5 How-do-you questions that Impact your Portfolio, a lot!

Do you have answers to these 5 How-do-you questions?  If you don’t, it is not too late, get it right with MoneyWorks4me

1) How do you know what is the right asset allocation for you?

Ajay holds 70% in Equity and 30% in Liquid.   Vijay: 90% in Equity and 10% in Liquid.  Ramesh currently holds 50-50. All claim they have an Aggressive risk profile. They feel they are right. If everybody is right, then who is wrong?

How do we address this?

We use a world-class risk profiling tool to identify your profile. This is very important as it determines your Core Allocation to Equity and Debt.

However, most people don’t take this seriously. And if they do, they don’t realize that you ensure core allocation only when the market is near fair value.

When the markets are well beyond fair value you need to reduce your exposure to equity and not go as per the core allocation. But how do you assess the market level? We have a proven valuation tool called Nifty@MRP which tells us whether the market is over or under-valued and by how much.

So when you approach us we advise you the right asset allocation based on your risk profile and the market level.

2) How do you know how much you should increase Equity if the market corrects?

During demonetization, the market corrected close to 7%, Ajay thought it is fully undervalued and increased Equity up to 90%, Vijay 100%, and Ramesh 70%. Yes, the market presents opportunities, but always there are risks. How do you decide how much more risk you should take to exploit an opportunity?

How do we address this?

Our Nifty@MRP tells us by how much the market is over or under-valued. Based on this the equity to debt mix for different profiles is smartly altered.

When the market falls below the fair value we increase your allocation to equity gradually, asking you to deploy your liquid funds to the new opportunities.

However, there are limits to how high we take your equity and for no profile, we take it 100% of your investable surplus.

3) How do you select which stocks to buy during a correction?

When the market corrects, everything seems to be a good price. But, not knowing their fair prices based on fundamentals you can end up buying still overvalued equities because they have touched their 52 week low. And you may end up missing opportunities to buy very good stocks at a reasonable discount.

It is really important to buy the right stocks when an opportunity comes knocking at your door.

How do we address this?

We have the valuation, the fair prices of stocks evaluated in advance and know what a good discount to buy them at is. We follow a tranche buying process ensuring you reach the intended allocation at a good discounted price.

We ensure the right allocation so that you have a well-diversified portfolio. When there are multiple opportunities we compare their risk-adjusted returns and recommend the best ones.

For Mutual Funds, we evaluate their potential upside while ensuring they have good quality underlining stocks. We then recommend the right mix of funds that give you a well-diversified portfolio that can deliver a healthy-high return.

4) How do you decide how much to allocate in a Stock or Mutual Fund?

Let say, you find the right stock to buy. How do you decide how much of this stock you should buy? Indian Bank was at a fair price at 220 during demonetization, Ajay bought 5% of a portfolio, Vijay bought 2.5% and Ramesh bought just 1% of the portfolio. The stock went up 35%, the returns earned on each portfolio is different.

How do we address this?

All stocks do not merit the same allocation in your portfolio, no matter how cheap (even compared to their fair price) they are available at.

We have categorized stocks into 3 and recommend a max allocation of 3-5-7% of your portfolio depending on how robust is the underlying business. Again we follow a tranche buying process asking you to buy a portion of this max allocation at different prices.

Similarly, for MF we recommend a mix of 4 funds to ensure you have different investment strategies working in your portfolio. And we ensure they don’t have similar holding because that would not give you any meaningful diversification.

5) How do you prevent yourself from acting out of your behavioral biases?

Titan during Demonetization fell to 320 an attractive buy price. Ajay, Vijay, and Ramesh bought it. However, Ajay sold it at 500. Vijay sold it at 640 and Ramesh didn’t sell it even at 960.

All of them are acting out of some bias they have about Titan and its prices. Or maybe they are not. How do we know this?

How do we address this?

We evaluate stocks and assess their fair price now and in the next few years. We have a tranche buying and selling process that is dependent on how robust the underlying business of the stock is.

When a stock is likely to deliver less than 8-9% CAGR over the next 3 years, we tend to sell it. Maybe the momentum of the stock may take it beyond our recommended sell price. However, this comes with a potential drawdown ie a possible correction.

We would prefer to reinvest this money in another opportunity that gives a better risk-adjusted return. When seen at a portfolio level we want to ensure you are not exposed to high risk-risk. In the short term, returns may be generated by luck too, but to make consistent long term returns one needs a process.

Suppose Ramesh had allocated 5% of his portfolio amount to Titan when he bought it. At 960, it would have become anywhere between 10-15% of his portfolio.

We would start seeing this as the risk we want him to avoid and thus recommend he trims his portfolio. The way to avoid our behavioral biases is to have a sensible process that you adhere to. That what we drive at Moneyworks4me

If you do not have good answers to these 5 How-do-you questions you are exposed to taking some wrong or incorrect decisions regarding your hard-earned money and are exposed to risks you are better off avoiding.

You play two important roles in your life:

  • The first is as the Provider for your family’s needs. This you do by working hard to earn money. At Moneyworks4me we can’t help you do this role better.
  • The second role is that of a Custodian and Manager of your Family’s Wealth. We can help you do this role better. We can prevent you from making costly mistakes and ensure you reach your financial goals through safe and smart investing.

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A team of business leaders, equity research analysts & investment counsellors. Started in 2008; experienced in equity research, financial planning and portfolio management. Passionate about providing institutional quality research and advice to Retail Investors in a simple easy-to-understand-and-act manner.