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Top 5 important tips for Managing the Portfolio for Beginners

Managing the portfolio is one of the most important steps of  whole stock market investing strategy.The basic objective of portfolio management is to reduce the risk.The secondary objective of the portfolio management is to increase the returns stock investing strategies.Following are the most important top 5 important tips for managing the portfolio.

Diversification

Diversification is the key for minimizing the risk in the stock portfolio.Systematic risk and unsystematic risk are two main types of risks faced by investors.It is possible to minimize the unsystematic risk but it is impossible to minimize the systematic risk. Systematic risk is inherent in the overall stock market. Diversification can be done through adding more and more stocks in the portfolio until it reaches the limit of diversification.

Keeping the ideal ratio of stocks in the whole portfolio

It is very important to keep an ideal number/ratio of stocks in your portfolio. Stock market experts believe that stock portfolio should consist of at least 8-12 stocks.These stocks should be selected after carrying out industry wise analysis.Experts also believe that value of single stock should not exceed more than 15 % of overall portfolio value.

Balance between fixed income and growth stocks

It is very important to keep an ideal balance between fixed income and growth stocks.This depends upon the risk tolerance level of the individual stock market investors. Portfolio manager must know the tolerance level of the investor. Risk tolerance level varies from investor to investor. Keeping an eye on this level will help manager to better advice the investor. Portfolio  with a 70% growth stocks  and 30% fixed-income securities are best for risk averse investors.Portfolio  with a 30% growth stocks  and 70% fixed-income securities are best for risk tolerant investors.This ratio is not fixed as it varies with the passage of time and changes in conditions.

Get maximum Information before selecting the stock

Investor must get maximum information about companies before investing in their stocks.Successful investors like warren buffet give great importance to this factor. Investor should get information about company business model, cash flow cycle,revenue streams,management practices etc.Company information can be gathered from disclosure documents,company websites,annual reports,news releases etc.These resources help investors to carry out in depth analysis of  selected companies in an effective way.

Diversification Ratio

The ratio of the risk of an equally weighted portfolio of n securities to the risk of a single security selected at random from the n securities.

The Diversification Ratio helps investor to measure the exact extent of the portfolio diversification. This ratio is also useful to compare more than two portfolios withe each other.We can say that diversification is directly proportional to the diversification ratio.The higher the Diversification Ratio, the more diversified the portfolio. It should be noted that adding large number of stocks in portfolio does not always improve the diversification ratio.

Diversification ratio can be calculated by the following formula

DR(P) = StDev of equally weighted portfolio / StDev of random security of the portfolio

A portfolio that maximizes the Diversification Ratio is very attractive for the portfolio manager and investor.It also plays an important role in minimizes the risk of the average investor.

 

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About Emaad Qureshi