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It's
okay, everyone gets shudders. A brief spell of dizziness, too-when
the going gets high, and getting higher looks to be more of a tightrope
than a marked-out trail. This is the point at which your resolve
counts. The trick, then, is to stay aware of risks-without looking
down-and proceed with a fine sense of balance.
Granted, as a retail investor, your own investment
instinct may have served you well so far. But with the Sensex having
zoomed by 2,462 points in 2003, the largest gain in any calendar
year since its inception in 1979, that's no surprise. This is 2004;
many more factors are in play, and entrusting some of your money
to experts may be a good idea from here onwards. Above 6,000 and
beyond, it would pay to know what's happening in the minds of sundry
eggheads and stock-heads who eat, drink and sleep the Sensex. Now
they won't spell it out for you, but you could access their expertise
as a client.
New Game Now
If you go by simple chart analysis, you'd see
the Sensex moving in an ascending channel 12 years, and spot a long-term
resistance level of 6,374. The natural question, in a bull market,
would be whether the index will break through the resistance or
not.
With the 'undervaluation' phase that drew swarms
of retail investors having ended, there's no easy answer anymore.
As Manish Chokhani, Director, Enam Securities, puts it, "The
margin of safety in valuations is no longer what it was at 3,000
or 4,000 levels." In simple language, this means that the specific
stock picks now must be far more discriminating. You buy a stock
not because it's available at an obvious bargain price, but because
you expect growth that hasn't yet been 'priced in' by the market
at large-a considerably dicier call. "And as the retail investor
may not have the necessary expertise in stock selection," says
Satish Menon, Chief Operating Officer, Geojit Securities, "it
is better he gives this (role) to some experts in the field."
Then there's the increase in volatility. The
rise has been astoundingly quick, and any reversal could wrench
your guts so badly that you may want to retire from active investing.
Raamdeo Agrawal, Managing Director, Motilal Oswal Securities, offers
a racetrack analogy: "It is like driving a car-anyone can drive
when it's slow, but the level of expertise should increase when
the speed increases."
| DUDE, WHERE'S MY EXPERTISE? |
| Deciding on entrusting part of your money to
investment experts is one thing, picking the appropriate experts
is another. Who should you go to? Here's a selection to choose
from.
Mutual Funds (MFs): ideal for small investors who need to
stretch a relatively small sum of money over a nicely diversified
portfolio. Since an MF pools lots of people's money, it offers
collective access to a wide range of stocks and bonds and
delivers expertise at a fraction of the cost of individually
tailored advice. "It is a good way out for people who
want to get into the stockmarket and who want to participate
in the overall economic growth," says Andrew Holland,
CEO, DSP Merrill Lynch. Of course, the decision on when to
enter a fund and when to exit (no fund manager will ever tell
you to pull out) is entirely up to you.
Portfolio Management Schemes (PMS): best suited to big investors
who can afford individual expertise to assist in portfolio
management. You have your own portfolio manager who 'advises'
you when to buy what, and when to book profits. There are
several such services available: discretionary (the advisor
offers advice, you make decisions), non-discretionary (like
a mutual fund, except that you have regular access to your
portfolio manager), and profit-sharing (apart from the base
fee, you incentivise your advisor by sharing a fraction of
your profit with him). The minimum portfolio requirement varies
from agency to agency (though you shouldn't expect a warm
reception with anything under Rs 10 lakh).
Broker Research: a service value-addition offered free by
most of the big brokerage houses, it can be used smartly to
manage a portfolio of your own. But still, keep yourself acquainted
with the brokerage house's own set of interests. Since the
house earns its own money on services other than this sort
of equity research, the reports it dishes out may not always
be free of bias (some houses try raising the 'buy' and 'sell'
frequency, while others 'sex up' some stocks over others).
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Portfolio Allocation
So you're ready to grant the experts their
role, then. But how much of your investment portfolio should you
manage yourself and how much should you entrust them with?
That depends largely on two factors-your risk
appetite (related to your comfort with market intricacies) and available
time.
First, let's assume time is no issue for you,
and you are ready to play a high-risk game in search of bumper returns.
Ideally, your comfort with the market should be a function of your
knowledge of the ins and outs of the game. So before you start off,
ensure that you're not deluding yourself on this part. "In
a bull market," observes Nimish Shah, Director, Parag Parikh
Financial Advisory Services, "the chance of investors getting
into overconfidence is very high."
How to test your confidence? Well, try this
simple thumb-rule: if you got into equities as an early bull market
entrant (say, when the Sensex was around 3,000), pat yourself on
the back-you've been well tuned in. If you're a seasoned investor
and have been trading profitably on your own for several years (not
'tip' based punting, mind you), it's also reasonable to assume a
fair knowledge of the scene. Now, if you're up to a risky game,
keep 75 per cent of your portfolio to yourself (for high-return
thrills without having to pay experts their fees), and allocate
a quarter (in value terms) to experts-by liquidating some stock,
if you can't add to the kitty from fresh earnings. This way, you
hedge yourself against the risks involved in not knowing what the
stock-heads might know.
Letting Go
If you have plenty of time and also believe
in risk moderation (or entered the market festivities last year
more than halfway up the incline), however, you may want to increase
the allocation to experts-say, 50 per cent. Half-half also provides
the bonus comfort of sounding nice and balanced. Again, it may make
sense to arrive at this new portfolio ratio by selling some stocks
you picked yourself (call it 'profit booking'), adding some fresh
earnings to the pile and handing it over to the smart folk who're
paid fat salaries to multiply its value. Of course, the danger is
that this split will lull you into the complacency that comes with
an extra safety cushion. Remember, since half your portfolio is
still under your direct charge, you take your eyes off the market
at your own peril. So stay focussed-and the interesting part of
the half-half allocation strategy, as you'll discover, is the personal
challenge (and possible thrill) of outperforming the experts.
If you're an investor with plenty of time,
you may also conceivably be risk-averse, particularly if you're
greying (or already grey) and are looking to maintain a tidy sum
of money earned down the years, rather than get rich fast on a small
sum by scorching your way up the market. In this case, and all the
more so if you're a late entrant to the equity boom (and thus not
quite in touch), it is advisable to turn over your entire portfolio-certainly
the equity portion-to investment professionals.
Why not do a 25:75 split? Well, you could try...
if you intend scaling up your risk profile once you gain more confidence
to do some more investing yourself. But since managing your own
portfolio involves so much effort (tracking stocks, watching overall
trends, tracing opinions et al), it is hardly worthwhile unless
you manage at least half your money.
But then, none of the ratios offered above
are hard-and-fast in any way that must satisfy some auditor's notion
of precision-they're just rough suggestions to help you structure
your investment strategy.
When Pressed For Time
Time, alas, is often quite a big issue to most
investors. If you feel yourself even the slightest bit pressed for
time, do yourself the favour of altering the above-suggested ratios
accordingly. The less time you have, the more money you should entrust
to experts. Just as people often assume greater knowledge of the
market than they realistically ought to, people also assume that
time can always be squeezed out of a busy work schedule to do justice
to their investments. Realism, again, is critical.
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