The Sensex and Nifty are at all-time highs. However, most investors’ portfolios are not at all-time highs. Rather, a lot of investors are still feeling the pain of negative returns in their portfolios. Many might be puzzled as to why their portfolios are showing negative returns when the markets are at an all-time high?

To understand this, we looked at the following data from S&P BSE:

Index YTD Returns
 Sensex  11.34%
 Sensex 50 9.32%
 Sensex Next 50 -7.97%
BSE MidCap -9.63%
BSE SmallCap -13.43%

It is easy to see that Sensex, which is the popularly followed index, is showing 11.34% returns for the first seven months of the year, which is quite substantial. Similarly, Sensex 50, which is primarily Sensex 30 with additional 20 companies, is also showing quite large positive returns for the year.

However, the Sensex Next 50, which includes stocks of largecap but those that are smaller than the ones in Sensex 50, is showing negative returns of 8%. Similarly, the BSE MidCap and BSE SmallCap are still showing more negative returns.

Considering this, it is not surprising that most investor portfolios would be showing negative returns. In fact, except for the top 5-10 stocks a majority are in negative territory.

How should an investor proceed from here onwards?

Our suggestion is that the investor first does a thorough review of their portfolio. The Scientific Alpha Portfolio X-Ray focuses on the following:

  • Do I understand the business of the company?
  • Have the sales and profits stable and growing?
  • Does the company have too much debt?
  • Does the company allocate capital efficiently?
  • Is the company available at a large discount to its intrinsic value?
  • How many stocks do you have in your portfolio?
  • What is the maximum allocation to a single stock?
  • Is it a diversified portfolio or a very skewed portfolio with only 2 or 3 stocks getting the maximum allocation?
  • Why did I buy that stock?
  • How do I monitor that stock?

You could also take help of the free portfolio review services of  Asit C Mehta. The review report will help you assess what is good, bad, or ugly in your portfolio and what actions you should take to realign the portfolio to position it for a good outcome.

Ideally, you will find out that you understand the business of the companies you have bought. You understand the P&L, Balance sheet, and Cash flow statements of these companies. You are able to determine the intrinsic value of these companies, and finally, you are able to assess whether they are available at a discount to their intrinsic value. Based on that you can decide a buy, sell, or hold decision on each stock.

Next step is to see if the portfolio is properly diversified. You should ideally have 15-25 stocks in your portfolio. Don’t have more than 10% allocation to a single stock. Ideally, 4-8% is the maximum you should aim for. If you have a larger allocation even in your most favoured stock, try to trim it to bring it below 10%.

If you don’t have at least 10 stocks in your portfolio, then you should look for more stocks. Before buying a stock, check for the issues discussed above. Next, check if all your stocks are from the same sector or industry. Ideally, you should diversify across at least 3-4 sectors, preferably more.

After all this is done and you are ready to create your ideal portfolio for the future, please check the following:

  • What is the PE of the company? If it is greater than 30 then ask yourself if that is justified and on what basis? You cannot justify it based on the fact that the PE for this stock has always been high and so it is ok.
  • What is the debt-to-equity for this company? If it is greater than 0.5 then what is the justification for purchasing such a high-debt company? If you have a very good reason then also check the interest coverage ratio.
  • What is the RoE of this company? If it is less than 10% then there has to be a good reason why you still want to buy it.

The above are just some of the steps that you can do at this time and focus on creating a wealth-generating portfolio for the future. Of course, remember to review your portfolio every quarter in the same way suggested above. As you gain experience you will be able to do that better.

Alternatively, for those who don’t have the time, expertise or inclination to go through the above process, you can choose the Asit C Mehta Portfolio Management Services or the OmniScience Capital Portfolio Advisory Services to do the above for you. Our SuperNormal Portfolio can withstand tough times.

As the title says, “When the going gets tough the tough get going”. The tough ones do not sit and complain about their portfolio but take concrete actions to either manage them in a thorough manner or take the help of professionals.

For more information, write us at [email protected]

Happy Investing!

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.