This is the last episode in the "Building Wealth" series.
If you have not watched the first 5 episodes yet, watch those first.
Links are in the description below.
Today 's topic is "Stocks Portfolio Management".
We will see how to build a stock portfolio based on our risk profile.
When it comes to stocks investment, we should remember two things.
1. We should not be investing in stock market with the money that we need for next 5 years.
Because, stock market is very volatile.
No one can say when it goes up and when it comes down.
The only thing that we know is that it will go up in long term. That is all.
So we should not invest the money needed for short term in stock market.
2. The chances of us beating an Index by investing in individual stocks are very slim.
Its a big thing even if 1 in 100 ca do that consistently.
So, avoid investing in individual stocks as much as possible.
I am not saying do not invest in individual stocks.
If we are doing it, know our chances of beating the index consistently and then do it.
Let's see how we can build a stock based portfolio.
My grand father used to tell us often - are the five fingers in our hand look the same?
Even though all our goal here is to add stock exposure to our portfolio, our individual risk profiles are different.
It is very difficult to suggest a portfolio for someone without knowing their risk profile.
Because, if someone from a low risk profile follows a high risk strategy, they will end up buying/selling the assets at the wrong time.
That will hurt the growth of their portfolio.
That is why it is very important to understand our risk profile.
Then build a portfolio based on that.
Without getting too much granular, at high level, lets see about three kinds of risk profiles.
Conservative, Moderate and Aggressive.
Lets see about Conservative first.
When it comes to investment, conservative means having less exposure to risky assets and having more exposure on safer assets.
But the "conservative" I am referring to here is within stocks investments, how to invest without taking much risk.
People who are new to stock market investing or who do not have time to monitor the market closely should invest conservatively.
If you ask me, people like us who are working full time should invest in conservative category.
If you are in India, you can invest in the following three funds for conservative category.
Nifty 50 - 50%, S&P 500 Index - 25%, Nasdaw composite 100 - 25%.
Nifty 50 is the best index in India. Top 50 companies in India are in this index.
Because India is a developing country and an emerging market, its growth will be bigger than that of a developed countries.
We can see Nifty 50 Index as a proxy to India's growth.
So if you believe in the growth of India, then you can definitely believe in Nifty 50.
On average, we can expect a return of 11-13% from this.
On average does not mean that we can expect the return in this range every year.
Because, stock market growth will be sudden not gradual.
Many fund houses are offering Nifty 50 Index.
Specifically UTI. They are offering it for a cheap expense ratio. Check it out.
S&P 500 is top 500 companies in USA.
Nasdaq composite 100 is top 100 Technology companies in USA.
If you would like to invest only in India, you can choose to invest only in Nifty 50 Index.
If you would like to have the exposure of the biggest stock market in the world, you can invest 25-25% in S&P 500 and Nasdaq composite.
We have two advantages by investing in US stock market.
1. We are getting exposure to world's best companies.
2. We can use this as a hedge for Indian Rupees depreciation.
Because the growth of US funds will be in US dollars.
Even though S&P 500 gives a return of 10-12% on average, it would have become 13-15% return in Indian Rupees.
Nasdaq has performed great in the last 10 years.
On average, it has given a return of 16%.
This growth has a good chance to continue on next decade as well.
So we can expect a growth of 16-19% from Nasdaq in Indian rupees.
Motilal Oswal is offering both S&P 500 and Nasdaq composite 100.
But their expense ratio is bit high. IF we buy directly, it is 0.49%. But I think its worth it.
So we can expect an average return of 13-15% from this conservative portfolio.
If you are in US, you can buy just this one fund for conservative category.
Vanguard Total Stock Market Index.
There are 3500 US companies in this index.
Like the guru of Index investing John Bogle said, "Why search for a needle in a haystack when you can buy the whole haystack?"
That is, instead of searching for a best performing stock, it is easier to buy the whole market.
So this is the best fund for conservative stock investors.
On average, we can expect a return of 10-12% from this fund.
Within the stock investments, this conservative category has the minimal risk.
We dont have to put that much effort into this as well.
Whenever we have money to invest, we can just continue to invest in this portfolio consistently.
That is why this is called "Lazy Portfolio" in the market.
If I have to recommend a portfolio to anyone, I would recommend this one.
When compared to other assets, this one has the minimal risk with maximum return potential.
Do not underestimate the risk on this because I said that it has minimal risk.
During recession times, there are chances for even this portfolio to go down by 50%.
But like we saw in "Recession" video, this shall pass as well.
In long term, it will look just like a blip and would not have hurt us.
The next category is Moderate.
"I understand the benefits of Index investing. But it gives only market returns.
If I am willing to take more risk, is it possible to get more returns?"
If you are asking that question, this category is for you.
But in this portfolio, growth wont be as smooth as in a conservative portfolio.
The ride will be bit rough.
That is, with higher volatility, the value of this portfolio goes up and down more.
But the chances of this portfolio beating a conservative portfolio in long term is higher.
But, we have to remember one thing.
In short term, that is within a year, if we compare the performance this portfolio with a conservative one,
If the conservative one has gone up, this one would have gone up higher.
If the conservative one has gone down, this moderate would have gone down even more.
We should remember that before buying into this category.
We can make few changes to the conservative portfolio and convert into a moderate one.
We can reduce the Nifty 50 from 50% to 30%, and for another 30% - we can buy a managed fund.
Before buying a managed fund, we have to check if it has beaten the Index consistently.
Also it should have beaten the index in long term - 5 to 10 years.
Like Canara Robeco Emerging Equities.
This fund has given an average return of 15% in the last 10 years.
But its expense ratio is high. If we buy it directly, it is 0.78%.
For US market exposure, the aggressive Nasdaq composite 100 can be bought for 50%.
These %'s are just a suggestion. You can adjust it to your comfort.
We can expect a return of 15-17% return on average from this portfolio.
US folks, we invested 100% in Total Stock Market Index in conservative category.
For this category, we can reduce that to 60%, and invest the rest of 40% in Nasdaq composite 100 Index QQQ.
QQQ has given an average return of 16% in last 10 years.
Or we can invest in a comparable fund by Vanguard - VGT.
VGT - on average has given 20% return in last 10 years.
VGT is a much broader index when compared to QQQ.
330 or so companies are in this index. Compared to 100 in QQQ.
Both of these are Technology heavy indices.
What that means is, we are investing 40% of total portfolio in one sector.
That is a risky move. But because Technology has good potential to grow in the future, we can see this as a calculated risk.
So on average, we can expect a return of 13% from this portfolio.
Next category is Aggressive.
If you are new to stock market investing, do not even come near this category.
Only people with at least 5 years experience should consider this category.
We need deep understanding of stock market to invest in this category.
We should have the knowledge of how different market sectors behave in different economic situations to invest in this category.
If we invest in this category without that knowledge, we will end up burning our fingers.
So handle it with care.
Another requirement for this category is having a complete understanding of the risk.
Because this one has the maximum risk.
So we should know how much risk we can handle before investing aggressively.
We would say, "Risk is like eating rusk for me" easily.
But if our portfolio goes down by 50%, do we have the stomach to handle that?
99% of us cannot handle it. But 80% of us believe that we can.
So ask yourself this question.
If your portfolio goes down from 1 Crore to 50 Lakhs in one month, what would be your reaction?
If you believe that you can be normal, then you can invest aggressively.
But if you say that you will loose your sleep over this, then Sorry - you should not be investing in this category at all.
Portfolio recommendation is not needed for people in this category.
They would already know about it.
If you are expecting a recommendation for this category, then I am sorry - you are not ready for this category yet.
We already talked about five fingers in hand are not the same.
So one template of investment advice is not going to fit all.
So going forward, I will be tagging all the videos in this channel to the investment category it belongs to.
If you see a green logo like this, it is applicable for everyone.
If you see a yellow logo, then it is applicable for moderate investors.
If you see it red, then it is applicable for aggressive investors.
Most of the videos will be in Green or Red.
Even if you are not ready for aggressive investments, you can watch red style videos to expand your knowledge.
Also, if you would like to know more about other good ETFs available in US market, you can check out the link in the description below.
Hope its helpful.
If you need any help with your portfolio, ask your questions in comments below.
I can give you my suggestions.
With this, "Building Wealth" series is coming to an end. Hope you all liked it.
We will meet again soon in the next video. Thank You.