Spring clean your portfolio, weed out dud stocks as equity market soars
Retail investors should periodically take 2 key steps: rebalance their portfolio and get rid of non-performing stocks
On May 29, Nifty hit an intraday high of 18,641, which is around 1.4 per cent lower than its lifetime high of 18,887. On the same day, the BSE Sensex hit an intraday high of 63,026, which is just 557 points lower than its lifetime high of 63,583. The closing figures of Sensex and Nifty were 62,848.6 and 18,634.5, respectively, on June 8.
On the growth front, there is some positive news conducive for equity investors. A stronger-than-expected fourth quarter lifted India’s growth to 7.2 per cent in FY23. On Thursday, the RBI retained its growth projection at 6.5 per cent for FY24, and lowered the retail inflation projection to 5.1 per cent. Recently, RBI Governor Shaktikanta Das said a cooling off in headline inflation to 4.7 per cent during April 2023 was “very satisfying”.
So, there are indications that the equity market may take all these positively, and investors may take the market to higher levels. This is the time for retail stock investors to examine their portfolios and initiate two important steps to retain their profits and enhance their returns in future: one, they must study their asset allocation plan to rebalance their portfolio, and two, get rid of dud stocks.
What is rebalancing?
Rebalancing refers to the process of returning the values of a portfolio’s asset allocation to the levels defined by an investment plan. Those levels are intended to match an investor’s tolerance for risk and desire for reward.
Suppose your assets are allocated 50 per cent into stocks and 50 per cent into bonds and fixed income securities. If stock prices rise, the higher value could jack up their allocation proportion within the portfolio to, say, 70 per cent. Then, you may have to decide to sell some stocks and buy bonds or invest in other fixed income securities to realign the percentages back to the original 50-50 target allocation.
Portfolio rebalancing protects investors from exposure to undesirable risks while providing access to the rewards. Many equity investors fail to do such rebalancing, leading them to over exposure when the market reaches higher levels.
Why get rid of dud stocks?
Most investors tend to avoid booking losses while booking profits happily. Initially, the loss may be 5-10 per cent. The investor feels this loss is acceptable and believes the prices will go up in future. Sometimes, the loss widens to 50–60 per cent or even more. Even then, he thinks, why sell the bad stocks now after already tolerating so much loss? But prudent investors periodically book losses, too.
This is the best time to remove the weeds from your stocks. Selling dud stocks is important, and you become a successful investor not only by the stocks you own but also by the ones you don’t.
No one can be 100 per cent successful in choosing a stock. There will always be some wrong stocks in your portfolio. Just do not hold on to such stocks. As you admit your mistake, you learn a lesson. As you have learnt a lesson, you will not make similar wrong investment decisions in future.
Look at the example of stocks like LIC India, which was falling from day one of listing. The investors who booked losses have actually gained, as the price has fallen further.
If a stock falls 10 per cent from your purchase price, it has to go up by 11.11 per cent to reach your purchase price. If it falls by 20 per cent, it must increase by 25 per cent to reach your purchase price. A 30 per cent fall can be offset only by a 43 per cent increase.
Hence, getting back the purchase price itself will be a difficult task when there is a deep fall from the purchase price. It will be prudent to accept the mistake of buying the wrong stock or buying the right stock at the wrong time, and come out of it.
It’s ok to book losses
The advantage of booking a loss is that you will move out of poorly performing investments and into better-performing ones. So, you will be able to recover your losses faster.
If a stock is good, it is always possible to reinvest in it in the future, and you need not forego the potential to earn from other stocks at present.
Booking losses also helps us use the loss against capital gain and save on income tax. Even carryover of loss is permitted (subject to conditions) when there is insufficient capital gain during the current year.
(The writer is a retired banker. The views expressed here are his own, and do not constitute investment advice.)