{"id":14660,"date":"2023-12-21T13:18:40","date_gmt":"2023-12-21T07:48:40","guid":{"rendered":"https:\/\/www.tickertape.in\/blog\/?p=14660"},"modified":"2023-12-21T13:19:06","modified_gmt":"2023-12-21T07:49:06","slug":"factors-to-keep-in-mind-while-deciding-portfolio-weightage","status":"publish","type":"post","link":"https:\/\/www.tickertape.in\/blog\/factors-to-keep-in-mind-while-deciding-portfolio-weightage\/","title":{"rendered":"Factors to Keep in Mind While Deciding Portfolio Weightage"},"content":{"rendered":"\n

Determining how to allocate your portfolio is a critical aspect of investing. Many beginners grapple with how much to invest<\/a> and divide those funds to minimise risks and maximise returns. While the former question may be distinct, the answer to the latter revolves around diversification<\/a>. Diversification is a key strategy to achieve higher returns while managing risk effectively \u2013 it’s like the old saying goes, “Don\u2019t put all your eggs in one basket<\/a>.”<\/p>\n\n\n\n

This strategy involves spreading investments across different asset classes and considering various factors to determine the right allocation for an investor’s needs. For instance, a retiree without a steady income might prefer a more significant portion of their wealth in fixed-income securities. On the other hand, a young professional starting their career might choose to invest their earnings from an internship in equities. The idea is that diversification is personalised to fit each individual’s circumstances and goals.<\/p>\n\n\n\n

When considering diversification, two challenges often emerge. Either investors make the mistake of under-diversifying the portfolio or going to the opposite extreme of over-diversification.<\/p>\n\n\n\n

\"\"\/<\/figure>\n\n\n\n

So in the above portfolio, even though the investor made great returns in the majority of the scripts, then, too, the portfolio has generated negative returns because a huge chunk of the portfolio was invested in a stock that performed poorly.<\/p>\n\n\n\n

\"\"\/<\/figure>\n\n\n\n

Now, on the other hand, if you look at this portfolio, even though the investor made some great returns in a lot of scripts but due to investing minuscule weightages of the portfolio, those returns did not impact the portfolio significantly, and the overall returns were about 7%. <\/p>\n\n\n\n

So, this is the problem we are going to address: What are some of the key factors one can look at when deciding on position sizing? <\/p>\n\n\n\n

1: Individual Risk and Return Expectations –<\/strong> Investing is a very subjective topic, and it will always differ for different individuals. By considering an individual\u2019s risk appetite, one needs to decide what the position size of the portfolio will be. <\/p>\n\n\n\n

For reference –<\/strong> My grandfather wouldn\u2019t load up his portfolio with volatile, high-growth SME companies; he would have some mature businesses giving him a high dividend<\/a> yield.<\/p>\n\n\n\n

2: Investment Bucketing –<\/strong> This refers to categorising stocks based on specific criteria like risk level growth potential or market cap. This practice helps in position sizing by allowing investors to allocate capital efficiently. <\/p>\n\n\n\n

For Reference –<\/strong> A company having a huge growth potential will generally have higher downside risk, too, so an investor can choose to have a lower or higher weightage in that company based on individual risk appetite. <\/p>\n\n\n\n

3: Correlation among asset classes –<\/strong> It’s important to avoid holding stocks with strong positive correlations for extended periods. If an adverse event affects a particular sector, having a diversified portfolio helps safeguard the rest of your investments from being overly impacted.<\/p>\n\n\n\n

For Reference –<\/strong> If your portfolio is loaded up with real estate and infrastructure companies, then in a rising interest rate<\/a> cycle, you might end up with many problems as both sectors are affected by interest rates. <\/p>\n\n\n\n

4: Liquidity –<\/strong> The liquidity of stocks significantly influences portfolio weighting decisions. When a stock has low liquidity, there should be a limit to its allocation within the portfolio. Going beyond this limit could make buying or selling the stock at fair prices challenging. This issue isn’t solely confined to large institutions; even individual investors might encounter difficulty when attempting to exit or enter positions in stocks affected by bulk transactions. Such scenarios can lead to increased volatility<\/a>, making it less straightforward to achieve fair prices for trades.<\/p>\n\n\n\n

For Reference –<\/strong> Suppose you’ve invested in a low-liquidity stock and held it for two years, enjoying substantial returns. However, when faced with a family emergency requiring you to sell, you find the stock’s price under pressure due to institutional selling. This creates a situation where selling at unfavourable prices becomes unavoidable.<\/p>\n\n\n\n

5: Scale Up Allocation with Deeper Business Understanding –<\/strong> As you grasp the granular details of a business and find it compelling, consider starting with a smaller position. As your insights deepen and your understanding grows, you can gradually increase your investment. With the company’s progress, your confidence and comprehension also elevate significantly.<\/p>\n\n\n\n

For Reference –<\/strong> A business you’ve followed for 2 or 3 years likely offers a deeper understanding compared to one you’ve recently studied.<\/p>\n\n\n\n

In conclusion, effective position sizing is an important aspect of successful investing. It’s not merely about the amount of capital invested but a strategic alignment with individual risk tolerance, return expectations, and market conditions. Remember, position sizing isn’t a one-size-fits-all approach. It’s a personalised strategy that evolves with an investor’s knowledge, circumstances, and the ever-changing market dynamics.<\/p>\n","protected":false},"excerpt":{"rendered":"

This article delves deeper into effective diversification strategies and factors to keep in mind while deciding portfolio weightage.<\/p>\n","protected":false},"author":111,"featured_media":14661,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"_lmt_disableupdate":"","_lmt_disable":"","footnotes":""},"categories":[1770],"tags":[],"acf":[],"modified_by":"Harshit Singh","jetpack_featured_media_url":"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2023\/12\/Image-container.png?wsr","_links":{"self":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/14660"}],"collection":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/users\/111"}],"replies":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/comments?post=14660"}],"version-history":[{"count":1,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/14660\/revisions"}],"predecessor-version":[{"id":14662,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/14660\/revisions\/14662"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media\/14661"}],"wp:attachment":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media?parent=14660"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/categories?post=14660"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/tags?post=14660"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}