This is a continuation of my last newsletter on ‘Asset Allocation’:
Coming back to the ‘Buy Low, Sell High’ funda, I was wondering if there was an easy way which even lazy guys like me could follow to increase my profits. I came across one sometime back. It is amazing in its simplicity.
I make certain assumptions – your investments are in debt (bonds, fds, etc) and in shares (midcaps and large caps). All the investments are good – which means that though they will go up and down, none of them will end up being ‘lifetime investments’!
Make three columns:
- Write down all your debt investments – bank fds, bonds, ppf, etc in the first column and total the amount.
- Write down the Large Cap stocks in the second column and total the value of these stocks.
- Write down the Mid Cap stocks in the third column and total the value of these stocks.
If you don’t know if your stock is mid cap or large cap, consult Google.
Once you have this data, write down the percentage of each investment. Say the total of the three investments is Rs.2 crore and you have 50 lacs in debt, then that category will have 25% of the total investment.
Having done this, give it a thought if you are happy with the breakup of your investments. It has to do with something called ‘risk profile’ – but let that not bother you for now. Say, your split is 25% Debt, 40% Large Cap and 35% MidCap and you feel that is ok, let it be. Any investments you make in the next 6 months, should also be spread out in these ratios. After 6 months, review the investments once again. Things will have changed – maybe the ratio now looks like 20% : 35% : 45%. This shows that the stock market has gone up quite a bit and within the market, the MidCaps have done much better than the LargeCaps.
Now comes the interesting part. Rebalance the investments such that it comes back to the original ratios – sell some Mid Caps and put the money in Large Caps and Debt, such that once you finish, it is back to the original ratio of 25% : 40% : 35%.
What you are essentially doing is that you are taking money out of something that has run up in value (become costlier) and buying something that is not doing so well (become cheaper). Essentially “Buy low, sell high”
I read somewhere that if done regularly, almost 90% of the gains of your portfolio will come about because of this exercise.
The whole exercise should not take you an hour every 6 months.
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