I’m sure most of you ended the turbulent year 2018 with negative returns
One has to Evaluate Your Stock Returns through the Entire Market Cycle
It is important to remember that stock market returns are never linear. This means that each year you could have widely varying returns. One year you may have average gains, followed by a year of handsome gains, followed by a year of losses, and so on.
So, don’t be overwhelmed by the performance of a single year. What matters really is your performance through an entire bull-bear cycle.
Let’s Learn “Stock Market Lesson” – Diversification & Re-Balancing.
What Do You Prefer – Virat Kohli or Team India?
Overambitious obsession for that “one Stock Idea, winning multi-bagger stock” which will change my financial Fortunes? We hope that there will be one Virat Kohli who will hit a century and win the match for the entire team. This doesn’t happen ALWAYS, He Fails sometime, so it’s Over-Dependence.
What I often find lacking is the team or Diversified Stock portfolio mindset in Investors.
Instead of hoping that one of your stocks will be like Virat Kohli, why not build a solid, winning team that does not have to rely on the genius of Kohli alone?
As cricket fans you will agree that there have been several occasions when Virat scored a century, but India ended up losing the match.
The same logic applies to your stock portfolio too.
Focus on the performance of your overall portfolio, and not just a few individual stocks.
Now, coming to the portfolio…
Let me offer you a very simple illustration.
In Table 1 Stocks which has given 40% Annual Return from Year 1 to Year 4 and in Year 5 Corrected by 50%, leading to Effective 14% CAGR Return.
In Table 2, Stock Portfolio given lesser 30% Annual Return instead of 40% Return of First table ,But fallen only by 20% in Year 5 ,Table 2 Stock portfolio Given effective CAGR of 17%.Portfolio 2 Won in long run with peace of Mind & Stability.
So, Return of Capital vs Return on Capital, It’s very important
There is no doubting the fact that you’re investing your money in stocks to earn handsome returns on your capital. But in pursuit of high returns, never forget that capital preservation (return of capital) is even more important than return on Capital.
No amount of research and filtering can save you from occasional investing failures and mistakes. That’s part and parcel of the game. You don’t shun stocks because of that.
Then how do you resolve this conflicting situation?
On one hand, you need to take risk to earn high returns.
And on the other hand, you want to ensure capital preservation.
The best way to solve this problem is through optimal portfolio allocation.
Example such as: A Stocks portfolio of 15 Stocks, Spread across 5 sectors with 5% to 7% Max Stock allocation.
If you’re entering a high-risk, high-return space, manage your overall portfolio risk by limiting your exposure to individual stocks.
One has to Understand, Team India with Viral Kohli is Proper Winning Combination, and