Mar 06, 2025 07:51 PM IST
Your portfolio tells a story. If the bleed is less than the market average, it’s a good story, else you need to read this
Stock markets go up and down. Investors who enjoyed the 20% plus a year returns for four years ending September 2024 are seeing red in their one-year returns on the Sensex but returns of two years are still in the 10% plus range. Held for five years, the returns are an impressive 16% average annual. These see-saws are not something new. Those who saw their portfolios plunge a heart-stopping 40% over January to March 2020, saw them roar back to double and more over the next few years. Over its history, there have been over 19 instances when the Sensex dropped 6% in a day, but over 24 instances when it rose by 6% in a day. The Sensex’s worst one-day fall was 13% in April 1992. But its best day was a one-day leap of 17% in May 2009. Markets go up and down. But the colour on your portfolio shows how you rode this horse. A horse is a horse. In this case, the horse is not wild but highly regulated. Now, it is up to the skill of the jockey to keep riding.
How you ride this horse depends on how well you understand it and its workings. A stock market is not a lottery ticket for overnight wealth, but a marketplace where firms offer their shares for sale to investors. Investors buy (or should buy) for two reasons — dividend income and profit. Both these come from profit-making (or future profit-making) companies that have the potential for growth. A higher share price indicates a greater profitability or growth potential or both. The short-term speculation on prices is not (or should not be) a game that investors play.
So, what should be your game? As an investor, your plan should be asset allocation and not speculation or short-term return maximising. You need to think of your investments as a portfolio rather than looking at individual stock or mutual fund returns. Each product has a role in the portfolio. Tell me, can you eat just rice without daal or vegetables as accompaniments? Or just eat pickle for the full meal? Hopefully not. The carbs and pickle need to be backed with protein, fibre, minerals and other nutrients for the meal to be complete. Look at your portfolio in a similar manner. Unless you have a mix of assets you are going to get indigestion. If small caps dominated your equity portfolio, by now you know what a full meal of pickle tastes like.
The most basic asset allocation is between debt and equity. Debt includes fixed deposits, provident fund, public provident fund, debt funds and other interest-bearing products. Equity includes direct stocks and equity funds. If you had all of your ₹100 in equity and the market fell 20%, then you lost 20%. But if you were 50:50 in debt and equity and debt returns were 6%, then you lost just 7%. Other than stabilising the portfolio, the role of debt in your portfolio is to give liquidity, safety and predictability. The role of equity is to give long-term inflation and tax-plus returns. You have a mix of debt and equity so that when you have a short-term need, you use your FDs, debt funds and bonds. You harvest equity in two situations. One, when a market run-up breaches your chosen allocation. As it must have done in 2024 — that was the time to pause your SIPs, not today. That was the time to sell some equity and buy more bond funds. Or when your goal is approaching — you then move from equity to debt. To keep money in the stock market for a near-term goal is dangerous. Markets go up and down and nobody can predict what they will be doing when you need the money.
Why do you need an asset allocation approach? Because of the reduction of risk that diversification, or holding assets with different attributes, brings to the portfolio. Debt and equity are not correlated. This means the volatility of equity is usually not felt in debt. As equity markets swing, the debt part of your portfolio gives stability. Portfolios with at least 30% in debt have lost less money in the last year than pure equity ones.
One step further in this thinking about diversification is within equity. Tell me: What is the chance that the one stock you bought will go to zero? That chance is non-zero. What is the chance that two stocks you bought will go to zero? That chance is non-zero. What is the chance that all 30 stocks in the Sensex and the 50 in the Nifty50 will go to zero together? That chance is zero. In fact, if you think there is a chance of all the stocks in the broad market index going to zero together, you should be buying guns, building bunkers, stocking grain and physical gold and not thinking about the current fall in stock prices.
Now look at your portfolio with both debt and equity together. Collect the value of your fixed deposits, count in your provident fund and public provident fund, include your bond funds and all your equity holdings and see if your portfolio has lost less than the market average. Your portfolio tells a story. It is your report card of your understanding of the market and how you participate in it. What is your portfolio telling you about what your understanding of the stock market is?
Monika Halan is the best-selling author of the Let’s Talk series of books on money. The views expressed are personal
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