Creating and managing a stock portfolio is not easy for retail investors as they are competing against professionals. Besides having an investment philosophy and understanding their risk profiles, here are some steps that can help them construct one:
DIVERSIFY: Good stock-picking is about allocating your capital efficiently across the best ideas in a diverse portfolio. Just buying stocks in one or two companies is not enough. You could be taking too much risk through a concentrated portfolio. Ideally, your portfolio should have no more than 20-25 names for benefits of diversification.
REVIEW YOUR EXPOSURE FREQUENTLY: While one investment strategy is to buy and hold, it does not imply that you do not manage your exposure by ignoring your portfolio. Market prices move, sometimes dramatically. As a result, you might have too much or too little exposure to one sector or stock. Avoid this by being disciplined about setting aside some time to review your exposure.
CREATE YOUR OWN SET OF RULES TO GUIDE YOU: Formulate your own rules for buying or selling a stock. Don’t follow the herd or come under peer pressure. What is good for others might not be suitable for you or your portfolio because your risk, investment criteria, tax situation and entry price might be different.
KEEP SOME CASH AVAILABLE: As good investment opportunities come unannounced, make sure that you keep some cash available in your portfolio to take advantage of them. If you are fully invested, you might miss good opportunities due to lack of liquidity.
If the above seems challenging, a do-ityourself portfolio management is not recommended. You could be better off investing in the markets through mutual funds.
Kartik Varma and Dhruv Agarwala are Co-founders, i-Trust
