Thursday, February 10, 2011

Create Investment Portfolio Staggered and Diverse

One go Investment can be fatal whereas staggered investment will grow the portfolio :-

Jumping from 100 Meters hight in one go will surely result in fatality however Jumping 10 steps of 10 meters each will take you to the same destination safe and live. Same is the case when in comes to building investment portfolio.

We never know what is the right time to make an investment in stock market, mutual funds or real estate. Now in such situation, the approach of making investment in one go for entire available funds is not advisable at all. Let the money take time to get into Investment portfolio and invest money over a period of time.

The key benefit from this strategy is that if one entry was at higher rates the other one can be at much lower rates and compensate the loss of earlier decision. It is nothing but adopting the method of SIPs introduced by Mutual Fund AMCs.

Narrowness of Investment Portfolio is dangerous :-

Narrow the boat, more the probability of its sinking in Storm. On the other hand, Broader it is, lesser the probability of its sinking.

Sometime investors get emotionally attached to particular share, mutual fund or some other investment product and divert major share of portfolio towards that product. I call such action as "Suicide". You would agree with me that profit does not come from emotions and Business is too far from emotions. So why a silly decision because of some stupid reasons like "I got good profit from this share", "This mutual fund is lucky for me" etc

Well, I would say that keep emotions away and diversify the portfolio as much as possible. Even within one category, you can further divide into sub categories.

Example of Diversification at first level :-
  1. Equity Share
  2. Mutual Fund
  3. Gold
  4. Real Estate
  5. Fixed Deposit
  6. Bonds
Now these key categories further can be diversified. Share of Equity can further be allocated in to different companies and sectors.

This strategy works well in almost all situations. How much it does well is subject to how fairly the diversification has been done. For instance Auto sector is not doing well and we have some allocation into Equity shares of XYZ auto company. In this case our small portion of equity will under perform but not the entire portfolio. Moreover better performance from other sectors can set-off/minimise the loss from XYZ equity shares.

Even further, for long run, investments like Real Estate and Gold are bound to increase, so even if there is under-performance from one segment of diversified portfolio, the others will help set-off/minimize the losses.

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