How to create a Portfolio for long term

Whenever I listen or read about investing, I only listen one thing. INVEST FOR LONG TERM.

I am not going to waste time for introduction as this subject is very old fight among investors. You will come to know so many views. I am trying to use facts and historical proofs.

so, lets start.

What is recipe and ingredients for one successful portfolio ?in fact what is portfolio ?

Portfolio is an asset of an investment of stocks, or photos if you are professional model. by definition its collection of assets.

What is important for making Portfolio? Objective, time frame, asset allocation, risk appetite with the person who know about it.

First steps making Investment Policy statement or IPS. In India, i believe not many people are aware about it. but its better to make it. It acts like guide book or map when in confusion. what is supposed to mention in it? so many things. like How much loss your client can handle. As risk appetite is not same for all, some dont care even 40%, some may got heart attack on 20% down and will advised to book profit on 25% up. There are some big NO-NO stocks for some peoples like for me, YES BANK. one more is ITC. Though I know how great business it is, but the fact that 60% of revenue of ITC is from Tobacco, I dont like. But I dont have any issue watching Bharat Electronic Limited, Maker of War Machine and some type of Radar, being in my portfolio. Investor who is working in church will never accept his money invested in stock of contraceptive manufacture.

Determining asset allocation is important step for portfolio. But the question is for whom you are doing it. The fact is age is important factor in determining asset allocation. Though I don’t believe the formula (100 – age) = allocation to equity, but I believe that lower the age, higher the allocation towards equity. Say you are 25 your old college going, having low liabilities. You can afford large allocation, even 100%. Whereas if you are in 30s your liabilities are different. If you don’t have knowledge about it, there are other ways to invest in equity like ETFs, Mutual Funds. Now some may say that Risk return profile of Global equity is different. My answer is No. EQUITY IS EQUITY. Difference is only with demography, different continents, different sectors and different future prospects. But still Equity is not equal to debt or some REIT, Infrastructure Investment Trust, or Private Equity. Private equity is different Because its not classical investment. Its alternative investment, Like combination of Leverage, High growth potential, Quality assets etc

How much RISK YOU CAN TOLERATE ? it depends on many cases. say You are F1 Driver. or you are entrepreneur.  You love to take risk. But if you are not making money to cover your expenses. Willingness and capacity are two different things and you supposed to take whichever is lower.

Another factor is your knowledge of the asset class, their risk and return. Here I believe what Modern Portfolio theory even though there are some flaws in it. It says that combination of two risky assets may or may not be as risky in portfolio. There are some jargon for explain it, but I don’t want to go into deep.

Next thing, which I believe is important in making decision of investment is conservative or aggressive. What is right asset mix as per Risk appetite. Generally lower the risk appetite lower the allocation to equity. Some investors like to invest whole capital whereas some like to keep cash in hand. If your target is under in 2 years, make large allocation in Fixed Income. if you think you have sufficient large wealth with you, then keep risk low.

After this all, one more thing is important in making your LONG TERM PORTFOLIO that is strategy. How to make right mix ?

  1. BUY AND HOLD : Buying Companies which having good fundamentals and Holding them for long term. One Example for such is Philip Fisher. He was invested in Motorola from when Motorola was manufacturing Radio for Fisherman to keep them inform about any cyclone. coffee can portfolio is way to utilize it.
  2. Market timing :  Though I am not supporter of market timing, but there are some followers of this technique. I am not sure weather technical analysis is helpful or not, but it is one where investor is timing the market. Another way to time market is Magic Formula investing. where investors select companies having good fundamentals and available at discounts. Though it is helpful in short term, but if replicate more and more times, it may prove as long term.
  3. Diversification : Holding 2 or more risky assets in same portfolio may reduce risk, and help to make more return on lower risk which is known as Sharpe ratio. Though some may say that it is not useful as it cant cover your portfolio in 10 or 20% down day but how many times you can see such big crash? anyway, this is one way to make your portfolio which is useful in long term.
  4. Dollar Cost Averaging AKA Systematic Investment Plan : You may be aware about this strategy as it is widely used. Recently I saw one large calculation that proving when you use it as strategy, you are in fact outperform benchmark. The reason for such out performance is you are using volatility for your benefit.
  5. Dogs of Dow : Though there is Dow in the name and this way of investing use dividend yield for searching stocks having good return plus some amount of dividend also. Its very easy to use. search the companies having lowest dividend yield. Invest for one year in that companies and change the allocation after one year.

There are many more techniques and strategies. But this are important one.

After searching and studying them, I can tell you that its better to choose right stocks and then invest in them for some time and sell them.

Going to end it with one tweet. Though it is GIF but I believe its good

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About Ashutosh Tilak

Tracking Indian Capital Market since 2010. Finance Student, On this blog I am writing about finance and Investing. You can contact me analystashu@gmail.com or @androidashu & @InsideFinanc on twitter