Why you shouldn't micromanage your investments

Investing can be likened to a team sport. Let's take a game of cricket to understand this better. In a cricket match, a player scoring a century could lead their team to victory. However, winning is not guaranteed without the contribution of every player on the team. While a few missed catches or low scores will always be part of the game, what matters is the final result. The same rule applies to your portfolio. Consider your portfolio as a team, where each stock contributes towards long-term wealth generation. Though there might be periods where some stocks underperform or don't generate positive returns, it doesn't necessarily mean that they shouldn't be in your portfolio. This brings us to the essence of this article - don't zoom in on individual stocks . Rather, develop a portfolio perspective. The purpose of building an investment portfolio is wealth creation. While there might be times when certain stocks may deliver low returns, your focus should be on the bigger picture. That is, you should track the overall returns earned by your portfolio over fixating on the performance of individual stocks. Overcoming the micromanagement trap To prove why overfocusing on the returns of a single stock can be detrimental to your investments, we constructed 10 portfolios and classified them into three broad categories: 1. Portfolios based on market capitalisation With the help of Value Research's market cap categorisation, large-cap, mid-cap, small-cap and multi-cap portfolios were created by taking the top 15 companies from each category as of January 1, 2014: Large-cap portfolio - Market cap greater than Rs 24,500 crore Mid-cap portfolio - Market cap ranging between Rs 24,500 crore and Rs 3,800 crore Small-cap portfolio - Market cap between Rs 3,800 crore and Rs 260 crore Multi-cap portfolio - The top five companies each from large cap, mid-cap and small cap 2. Portfolios based on Stock Ratings Using our recently launched Stock Ratings tool, we built five different portfolios based on growth at a reasonable price (GARP), high quality at a reasonable price, fast-growing mid and small caps, small caps high on quality and growth and quality at any price. The GARP portfolio was constructed by taking historical Stock Ratings as of FY14 and applying the following filters: Growth score greater than or equal to seven Valuation score greater than or equal to three Quality score greater than five 3. Portfolio based on PAT growth Lastly, the 'Three-year PAT growth' portfolio was built by picking companies with a market cap greater than Rs 500 crore and the highest three-year PAT (profit after tax) growth as of FY14. Interestingly, these 10 portfolios were held for a decade without any churning. You will be surprised to see how they performed over the years. Portfolio returns across a 10-year horizon Despite a few poor performers, most portfolios outclassed the index

This article was originally published on February 01, 2024.