Emotions is not a great friend of investor
HDFC SEC, Tester
One size fits all. This is a cliché in vogue since 1970. Should the same be applied to the stock market too? What is suitable for one investor may not be necessarily ideal for others also. You may think if the company is good for one, then how can it bad for someone else?
Let me explain it to you through an example. I have a portfolio with 40 percent exposure to FMCG. A new research report comes out that says buy another FMCG company. Should you buy it as you already have 40percent exposure? By buying more of the same sector, are you not overexposing yourself to one sector? When the novelty of the sector goes away, you stare at huge losses as something recently observed by investors who overexposed to banks and NBFCs. Someone who has no exposure to the FMCG sector can buy the stock based on research.
In the same way, I am holding 60 percent of the portfolio in Mid-caps. Should I buy more of Mid-caps? The answer is No. But someone who has no exposure can add mid-caps companies to portfolio.
This is exactly how our optimizer tool works. We treat each investor as unique. We carefully look at the investor’s profile and investment habits. Due to this, there is a fair possibility that a portfolio optimizer may ask someone to hold one company and, at the same time, ask someone to sell.
Risk Profile and Investment Pattern are Key Factors
So, when you start using a portfolio optimizer, be careful in terms of selecting your risk profile and your investment horizon. Are you conservative, aggressive, or moderate? Are you looking at the short-term or long-term? Our Artificial Intelligence would recommend which category of investor you are and what kind of investment horizon you usually look at. We decide based on your historical investment pattern. But this is just indicative, and the investor can change both the parameters that he or she believes to be a perfect match for the profile.
Based on your selection, our portfolio optimizer will tweak the logic to suggest to you what is best for you. If you are a long-term investor, the portfolio optimizer will recommend based on our long-term drivers - quality and valuation. If you are more short-term in nature, the portfolio optimizer will give more weightage to factors like CFT and Technical. If you are a conservative investor, our portfolio optimizer will restrain from recommending small caps. But in no case, it will endorse your weak quality stocks.
Hence, it's very critical that you spend some time to decide what risk profile and what's the time horizon for your investment.
As I mentioned in my previous blogs, the complete exercise is quite intuitive and simple. It only takes a few minutes to complete the process.
Based on experience, I have seen a few investors who are not willing to follow the suggestion given by the optimizer tool. This is mostly in cases where investors have to book losses or don't wish to sell favorite companies. Emotions are not a great friend of an investor. Biases are our enemies, and that doesn't allow us to do what is good for the portfolio. In case you also face such a dilemma, I suggest you keep aside your biases and follow what we are proposing. You would see a substantial difference in your portfolio returns in the next 12 months.
But apart from returns, you will observe that your portfolio will consist of good quality companies with the right mix of sectoral cap and market cap. You will also note that number of companies that you are holding will come down, and that will result in generating higher alpha in the portfolio. Hence don't overthink. Just start using a portfolio optimizer tool.
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