Portfolio construction: Why keeping it simple is crucial

Jan 22 2013, 09:20 IST
Comments 0
SummaryCricket is the favorite pastime for a majority of us. Each one of us will have an opinion on every aspect of the game.

Cricket is the favorite pastime for a majority of us. Each one of us will have an opinion on every aspect of the game. Similarly, many of us see ourselves as seasoned investment gurus knowing (or pretending to know) its each aspect. Well, for the true gurus, it took years of toil and self-belief before they became persons of authority in their field. Likewise, the foundation for your wealth creation is construction of a strong portfolio. And portfolio construction gets the least attention.

A Yuvraj cannot become a Dravid overnight and vice-versa. Similarly, you need to know your risk appetite, choices and goals. With this background, you go about building your innings. You set small targets, which are in sync with your overall long-term goals. In the early part of the innings, you tend to leave the balls pitched outside your off-stump, get yourself accustomed to the pitch and the ball movement and generally make yourself comfortable.

Similarly, in portfolio construction, you will set your goals and return expectations, and rebalance targets. As in cricket, you can set your target, if you are batting first, or chase a target if your batting second. If you have a lower risk appetite, you will want to achieve a real return beating inflation on a consistent basis. A higher risk appetite will indicate that you can cope with volatility, which could lead to an alpha return over the investing period.

Simple and easy to do Many-a-times, we miss the trees for the woods. We chase returns because the human mind has been conditioned towards it. Quick returns are good for your ego and it takes tremendous amount of patience not to follow the herd.

A well-flighted ball is asking to be hit. But with the fielder positioned at long off and long on, will you take the bait. More times than not, Yuvraj may take the bait, but Dravid may not. There is nothing right or wrong about it. What matters is the confidence each of them has while executing the shot. So, execution is the key.

Similarly, your mental make-up, which drives your portfolio design, plays an important role in the wealth creation journey.

You cannot compare the equity returns with returns of other asset class. So, having an appropriate asset mix is the core requirement. This is more popularly known as asset allocation. Again, there is no thumb rule about the

Single Page Format
Ads by Google
Reader´s Comments
| Post a Comment
Please Wait while comments are loading...