I have been investing in stocks for the past three years. I am a long-term investor and prefer investing in big companies. However, I am unable to book profits occasionally. Whenever I try to do so, the price of that stock starts moving upwards and I regret my decision. I fear that I may be making an early exit when I want to book profits and re-enter at lower levels, but am unable to derive a strategy. There are also some sectors like textiles, in which I have been stuck for quite some time. Should I book losses in such stocks?
V. Gupta
Your consistency has paid off. By being a regular investor for three years, you have accumulated some large-cap stocks at enviable prices, thanks to the rupee cost averaging strategy. A perfect example would be your holding of Reliance Industries (RIL) which you have averaged at a price of Rs. 1,148.
Though we noticed no particular investing strategy or style, your portfolio is currently giving you handsome returns in excess of 50 per cent. To compare your investment pattern, we created a virtual portfolio and invested the amount in an index fund. You were ahead by a remarkable 12 per cent. You don't need to alter your portfolio much. But here are some suggestions on how you can rebalance it. We've also provided a few basic rules which every investor should follow while investing in stocks.
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Set a ceiling for exposure to a particular stock
You must set a maximum limit for exposure to a stock as over exposure can prove disastrous in a struggling market. In your portfolio, the value of RIL shares is around Rs 1.58 lakh, that's an upside of 108.7 per cent from your cost price. The rapid appreciation of the stock's price has resulted in it cornering 32 per cent of your portfolio. Conse-quently, one-third of your portfolio is dependent on just one stock. It would be great if you could moderate your risk by reducing your exposure to RIL.
Avoid small holdings
The price movement of the stock should never be the sole reason for buying it. You must have a sound reason for investing in a particular company. And once you do, try to have a meaningful exposure to each without going overboard. Your portfolio consists of 22 stocks, with just three losers. But 12 of your 22 stocks have an allocation of less than 3 per cent. You've missed out on enormous gains from stocks like IFCI just because of your small and negligible holding (under 1 per cent). Such stock holdings add little value to the portfolio and instead makes monitoring a more tedious job.
Book profits occasionally
If you plan to book profits occasionally, you must set a target price for your stock. This is another reason why you must have a meaningful position. If you do, you need not sell the entire holding. By adopting the strategy of booking partial profits, you can sell 20-30 per cent of your holdings on every price rise. Should the market tank and the price of the stock fall, you can re-enter at a lower level. Should the market rally, you can benefit from the upside by offloading portions of your investments at a later date. Whichever way the market moves, you win.
Limit the exposure to a particular sector
Just like a diversified portfolio is needed in stocks, the same holds for sectors. It must not be skewed towards one. In your case, 35 per cent of your portfolio comprises of energy stocks. Such high allocation to a single sector can make your portfolio look weak when the energy sector turns bearish. Hence, it is advisable to reduce exposure to energy stocks and move to some other sectors to make your portfolio more diversified. The practice of being exposed to various sectors makes the portfolio more resistant if a particular one underperforms.
Review periodically
When investing directly in equities, you must monitor your investments regularly. In a mutual fund, your fund manager does that for you. Keep a tab on policy changes and tax issues affecting the sector. If the sector outlook gets bearish, it would adversely affect your investments. But, if you are convinced about a company's future prospects, you should remain invested in it irrespective of its short-term price fluctuations. You can use the Value Research Online Portfolio service. It will help you keep a track on your investments as well as analyse your sectoral compositions.
Following the above rules will ensure that you have a well balanced and diversified portfolio.
But if you want to speculate, then it is another ball game. Our advice: Tread cautiously. Limit, say, 10 per cent, of your investments to speculate on stocks. Don't try it with all your holdings.
This article was originally published on February 08, 2008.
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