WHY MAINTAIN A FOCUSED EQUITY PORTFOLIO?
While building your portfolio whether you are a newbie or a seasoned investor, you need to remember; too many stocks spoil the performance of the portfolio. This is a proven fact with many successful examples and the concept of maintaining a focused portfolio is endorsed by all the mega-successful equity investors in India as well as abroad.
If you are an equity investor on the path of generating Alpha-returns in your own portfolio, in quest of knowing everything about everything you end up knowing very little about everything, which actually does more harm than help you. You don’t need top 50 or 100 stocks to make money; only 10 to 15 great quality stocks will do the trick.
We had designed a customized portfolio service called Penny Stock Portfolio in which we had focused only on top 10 high-quality Penny stocks. The portfolio was well balanced in terms of sector allocation and stock specific allocation and it has proven to be a huge success for our subscribers. Our Penny Stock Portfolio delivered 86% average returns from October 2016 till date compared to BSE Small-Cap Index returns of 38% in the same period. The same is displayed below in the graph –
Here are our top 5 reasons why a focused portfolio is the only way to creating wealth in the long-term –
#1 DIVERSIFICATION IS THE KEY
The top reason why investors prefer keeping a high number of stocks in their portfolio is that of their belief that if they spread their investments in more number of stocks they will be able to minimize their losses. Well, that could work if your only goal was to minimize your losses, but this strategy will not work if your goal is to make above average returns for which the stock market is known for.
We are not against diversification in the portfolio but it has been proven that spreading out investments in few high-quality stocks will always yield above-average returns for you in the longer period of time. Have a look at our portfolio that we had designed last year where we focused on the few high-quality companies –
#2 YOU DON’T NEED TO LEAVE YOUR COMFORT ZONE TO MAKE MONEY
Majority of investors have always believed that stock investing is a science that can be understood by only the sharpest minds and ones who do are the only ones who make money.
Well, that is not true.
The investors who have made fortunes investing in stock market call themselves to be just as average as any other investor but they seem to understand just 1 concept clearly than most of the other investors – Investing in what you understand.
Invest in only those few companies whose business models and the industries you can completely understand. This goes a long way in keeping your confidence in the stocks you own in your portfolio.
#3 FOCUSSED PORTFOLIOS HAVE HIGHER CONVICTION
Since you have only a number of stocks in your portfolio, they tend to be focused on few sectors. This displays conviction of your portfolio to those growing sectors and provides a qualitative advantage over other portfolios with stocks from almost all the sectors which may or may not grow.
For example, if your portfolio was heavily invested in housing finance and construction sectors then you would have surely made huge profits in last 2 years since we have seen the pickup in the sector and the government spending has also increased in the sector giving it great future prospects for growth. But on the other hand, if you had invested in the Petroleum, FMCG, IT or Pharma sector you could not even beat the Sensex returns.
#4 FOCUSSED PORTFOLIOS ARE EASIER TO MANAGE
As we spoke about your comfort zone and investing in industries you understand in point no. 2, it makes maintaining your portfolio much easier when you have a personal interest in the industries in which you have invested.
Let’s say you have worked in the field of Banking for a better part of your life and also hold a keen interest in finance. In this case, you are well positioned to understand the complete industry and have in-depth knowledge of which banks are well positioned for growth than a newbie trying to understand the banking system for the first time.
Another added advantage of limited stocks in your portfolio is that it saves your time and energy. What if you had 50 stocks in your portfolio? How much time and energy would that require tracking and maintain?
#5 FOCUSED PORTFOLIO SIGNIFY QUALITY
A focused portfolio must hold the stocks which possess enough potential to give higher returns. A smart investor will not want to dilute her/his concentration on the stocks that do not add a significant value even after considering the power of compounding. Quality of portfolio is also determined by adequate attention given to the stocks in your portfolio. The quality of stocks thus is one of the most important characteristics of the focused portfolios. Focused portfolio serves as a key factor in long term wealth creation. The quality of stocks and the limited number of stocks in the portfolio signify the overall good quality of portfolio and higher conviction for performance and vice versa.