Decided to come up with ocassional topics of the day. The first topic I would like to elaborate on after sharing my portfolio is portfolio allocation.
Now, you might be wondering why I chose the stocks that I had and why are the industry positionings as such.
Well, the short answer to that was that the industrial allocation was a subsequent result of the stocks that I chose. Also, I was fully aware of the importance of diversification when I was constructing my portfolio (which took me around a year to build).
So remember, before we even go into individual stock selections and drilling into numbers and reports, the importance of having a well diversified and balanced portfolio cannot be underestimated.
Tips for Portfolio Allocation:
1. Choose industries that have lower correlation and neutral to market trends
- Eg. banks versus transport represent a low correlation
- it is important to have a mostly neutral allocation as in the event of market rotations from cyclicals to consumer staples, you will not be caught flat flooted.
2. Keep the number maneagable
- Eg. It is far easier to manage 4-5 industries that you are well informed about
3. Avoid Industry concentration
- Eg. Avoid putting all your stocks in only one industry. If you only buy bank stocks and if there is a financial crisis, your portfolio is severely impacted.
That's it. 3 easy steps to build a stock portfolio that is balanced, easy to manage and with risks managed.
Comments and sharing are most welcome!
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