Everyone talks about portfolio diversity, how much is enough and how much is too much! See attached report for safety of portfolio I have selected randomly
What happens if you put all your investments into one basket?
If the basket crashes like bad ones-your money is gone, if it flies you will also fly. It is pure gambling not investment.
Investment should have measurable risk and measurable gain!
What about 2 baskets , 3 baskets, 15 baskets?
Combined yield of all baskets based on historical data is the right step to diversify. Historical data is a lagging indicator? Do fundamental Analysis and cash flow Analysis then select scrips that are good. Historical data use as reference guide to diversify but not as any indicator!
After that comes the real problem-
- Does my good scrips always remain good? if my good scrip crashes how much money I lose?
Don’t assume it is hypothetical situation, Jetairways was talking merger with Etihaad, it was having an upward momentum one day before it went down! Yes Bank, DHFL, Suzlon were at sometimes amazing performers!
Hence your diversity should be stock agnostic- means independent of stock you select!
If I look at NSE data – this data is clearly visible, last decade or more 10% of Large cap have landed in their bottom 5% value.
At present there are 284 Listed Large cap NSE scrips- one can approximate by long term data 28 of them can reach this bottom 5% value during next decade.
If you have one scrip in large cap, 10% chance it can be one from 28 bad scrip. This they call it as hypergeometric distribution in probability.
Don’t worry about that if math is not your cup of tea-
For Large cap if you have seven scrips with 95% confidence level one can say 5 scrips will be definitely good scrips. This is where your investment into multiple baskets can save you.
For mid-cap it is 40%, to achieve same level of safety you need 12 scrips. Then one need to balance portfolio based on minimum variance to reduce combined risk further.
Small cap it is only a growth accelerator based on fundamentals and price momentum as 50% of small caps reached bottom 5% in last decade. If you go for safety based on diversity, difficult to manage so many.
As you add more scrips than these numbers, your portfolio safety increases but your return on investment averages out not getting good results plus time spent in managing and monitoring becomes tedious.
I am attaching a report based on web-based tool to show how safe is this portfolio. I have randomly selected portfolio of 3 scrips- these are not my scrips -only for illustration purpose
var report AntsAnalyzer.pdf (160.9 KB)
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