Is your equity portfolio hurting you?

Most equity investors believe that mid- and small-cap stocks or funds are the real wealth builders

Most equity investors believe that mid- and small-cap stocks or funds are the real wealth builders  


Higher the risk, higher the swings. If you want to blunt the impact of high volatility, opt for a diversification strategy

If you think I am going to provide a panacea for equity market volatility, I am afraid I have none.

I think most of you have very little reason to complain. This is because for the vast majority (going by the savings data of the country), equity accounts for 5-10% your overall investments. When I say investments, I include deposits, real estate, insurance (if you are using it as an investment) and gold. And, a majority of this is in deposits, going by RBI’s data on the quantum of individual deposits.

So, why, then, would the market volatility cause you so much pain? Simply because that is the only moving part in your portfolio. It swings all the time! And more importantly, it is so easy for you to track it every hour of the day, every single day!

Take it in your stride

While it is important that your equity performs well over the long term for those kicker returns, it is equally important for you not to miss the forest for the trees. Instead of ruing over the negative returns in one small-cap fund, you will do well to look at the tiny blip it caused to your overall investments.

If you cannot deal with this volatility, you are better off shifting even the existing 5-10% into your other investments that you either cannot track or which don’t swing wildly. It is not worth doing much planning, market timing, reading, and constantly acting, really! For, there is no way you can eliminate such movements.

In my experience, a small proportion of investors — a growing number, though — build their portfolios primarily using equities (stocks or funds or NPS). They genuinely believe that only equity will help fulfil their long-term aspirations and build wealth.

There are a few things that this class of investors can do to reduce the volatility in their portfolio through the simple strategy of diversification.

Higher risk, higher swings: Most equity investors believe that mid- and small-cap stocks or funds are the real wealth builders and often go overboard on these segments; holding over 50% of their portfolio in them. Now the issue is, these wealth builders can be wealth destroyers too! And even if you held good mid or small-cap funds, if they lose the plot in a fall, it may take a good while to climb up again. Hence, going overboard on the riskiest of the risky asset class is not a good idea for long-term wealth building. Even a 15-25% holding in these segments can boost your portfolio.

The same holds good for sector or thematic investing too. Sectors become conspicuous at their peak. So, often, your entry point goes amiss. While sectors such as banking or consumer goods may not lose their flavour as they are the core of any economy, other cyclical sectors or commodity segments need timing of entry and exit. If you miss the bus, you not only lose an opportunity to build wealth but also suffer from opportunity loss by holding them.

Not flashy asset classes but diversifiers: In the past 3 years, some investors who held gold may have exited it, totally disenchanted with the returns. But gold surprised in 2019 with a more than 20% returns as global turmoil and trade wars meant investors sought refuge in the metal. But the problem, as I have observed, is this: most people invest in gold seeking high returns and exit disappointed. Gold failed to even beat debt for almost three years until 2019. But one fine day, it stood tall, protecting your portfolio from the equity volatility. It may again go back to oblivion after such glory. This is the limited purpose of gold. If that appeals to you, use it to diversify with some 10-15% exposure and not to gain top returns.

Hedge with global exposure: Did you know that over the past three years, the U.S. markets outperformed India? But very few among you would hold this class of funds or stocks.

Here again, the problem is that you tend to go overboard with such options when performance is at a peak and ditch them when Indian markets return to firm. That is a flawed approach when you use them as a diversification option. Two things help with this kind of investment: one, you get to invest in a market outside India and hence diversify. Second, if you are spending in dollars for future goals such as children’s education, this can provide some natural currency hedge.

Get a bit passive: Finally, if everything seems unclear, having some exposure to index, through funds or ETFs, will ensure that you at least stay with the market. This is not an option that agents or relationship managers will suggest. So, seek it yourself for at least 10% of your portfolio.

After all this, there would still be volatility! Deal with it. If I should sound more intellectual, learn to be ‘antifragile’. That’s the term from Nassim Nicholas Taleb’s book “Antifragile: Things That Gain from Disorder”. Taleb says we should be antifragile — let shocks and disruptions make you stronger and help you adapt to newer challenges. And, always, look at your overall portfolio performance when you look to see how your investments are doing. Remember the forest and the trees!

(The author is Co-founder,

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Printable version | Jan 28, 2020 11:29:15 AM |

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