Most people are guilty of investing on stock tips.
And to an extent, its because of the information overload these days. People are flooded with stock tips from everywhere.
1. A friend told you about a stock he likes. You invest in it.
2. An office colleague has a hot stock tip? You invest in that too.
3. Got a stock tip on whatsapp group? You buy that too!
4. And TV channels have an unstoppable flow of stocks tips everyday! You buy some stocks based on those recommendations too.
Your stock picking and investing is random at best. And you end up with a directionless portfolio of unrelated stocks that in most cases, ends up in losses.
Ideally, this is not the right way to invest in stocks for the long term.
When you receive a stock tip, youwill come to know about the stock name along with few other unimportant data points. But you will not get to know about:
1. Why ‘exactly’ is the stock worth investing for long term?
2. What is the price range in which it should be bought?
3. How much you should invest in an individual stock?
4. What is the upside potential of the stock? (in 1, 3, 5 years)
5. When to sell and in which company to invest further?
The answers to these questions are very important if somebody is looking to invest for long term into equity markets. And these questions will be answered only when you follow an overall portfolio approach for investments.
Why You Should Go For Portfolio Approach For Long Term Investment In Equity Markets?
The Portfolio Approach is based on the thesis that one should invest in few, well-researched stocks of good businesses, by allocating maximum weightage to stocks that have the highest potential to grow.
Unlike random stock tips, this approach provides a complete end-to-end investment solution to the investor. It hand holds the investor through the entire lifecycle of the investment.
This approach provides investor with a list of well-researched stocks that are part of the recommended portfolio.
Alongwith the names of stocks, the portfolio approach answers all the questions discussed above which generally don’t get answered when you invest in Ad-hoc 1×1 stock tips provided on daily/weekly/monthly basis.
Since all the stocks that are worth investing are informed to the investor in one go (by means of a recommendedportfolio), the equity portfolio advisors also do risk managementby evaluating below mentioned questions.
1. How many stocks should be part of the portfolio?
2. How many sectors should form the core portfolio?
3. What should be the percentage allocation for each sector?
4. Is there any specific sector that needs to be allocated higher weightage due to its better potential?
5. What is the market cap of the portfolio?
6. What is the possible portfolio upside/downside in next 12-15 months?
A point to note here is about ‘stock specific portfolio allocation’. Lets say if the recommended portfolio is made up of 15-20 stocks. Now its obvious that future growth prospects of few stocks will be higher than others. So portfolio advisors will ensure that allocation to these stocks is higher – to take benefit of their higher growth.
Any company specific news/events can have a big impact on the original investment thesis. So it is imperative that the portfolio is continuously monitored. This involves detailed quarterly reviews of each and every company’ performance too. As and when there is a need, portfolio managers will publish immediate recommendations to change weightages or positions to maximize every investor’s ability to benefit from the opportunity.
Now compare this solid portfolio-based approach with that of ad-hoc tip based investing.Just by knowing thestock names and investing random amounts here and there won’t help you succeed in markets.
You need an end to end solution of picking and monitoring stocks.
You need to invest the right amount in right stocks at the right time. And the portfolio approach helps you do exactly that. In long term, that is how wealth will be created.
Co-authored by Mr. Manish Goel, Founder and Director, Research & Ranking and Mr. Gaurav Goel, Founder & CTO, Research & Ranking.