Financial Daily from THE HINDU group of publications
Sunday, Dec 04, 2005
Financial Daily from THE HINDU group of publications Sunday, Dec 04, 2005 |
|
|
|
|
|
|
|
Investment World
-
Stock Markets Columns - Simple Economics Portfolio diversification B. Venkatesh
IF YOU want to construct an equity portfolio, would you buy a large quantity in handful of stocks or would you buy a small number of 15-20 stocks? The answer depends on how you pick your stocks. Why? Suppose you buy stocks based on fundamental analysis. You will typically construct a diversified portfolio. That is, you will buy 15-20 stocks that are not strongly related to one another. If you buy a stock in the automobile sector, you may add one from the sugar sector. The idea is to ensure that the portfolio is not badly affected by the bad performance of one or more sectors. There will be stocks in other sectors that will perform better and lift the portfolio returns. Studies suggest that a well-diversified portfolio should contain about 20 stocks. But what if you follow technical analysis? You will buy on breakouts. That is, you will buy a stock after it moves above a certain price. Such a price movement tells you that there is a greater chance of the stock moving up from the current level. You will, hence, buy large quantities in fewer stocks. One reason for doing so is that you have a shorter holding period compared with those who buy on fundamental analysis. The other reason is to do with money management. If you buy stocks based on technical analysis, you will invariably place a stop loss. If a stock goes below this price, it means your analysis is wrong. The stop loss helps you come out of that trade with minimal loss and move into another one. Because of this tight risk control measure, a person buying stocks based on technical analysis does not quite believe in portfolio diversification. (The author is head, Research at Navia Markets.)
Article E-Mail :: Comment :: Syndication :: Printer Friendly Page More Stories on : Stock Markets | Simple Economics
|
Stories in this Section |
|
The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription Group Sites: The Hindu | Business Line | The Sportstar | Frontline | The Hindu eBooks | The Hindu Images | Home |
Copyright © 2005, The
Hindu Business Line. Republication or redissemination of the contents of
this screen are expressly prohibited without the written consent of
The Hindu Business Line
|