Becoming our own wealth manager

Why PMS is only above 50 Lacs ? If we ask this question, most of the answer we will get is – Its for people who have either better knowledge/understanding of the market or risk taking appetite. Well then does it mean that wealth management is not meant for anyone with less than 50 lacs of investable income as they donot have the risk appetite or relevant knowledge ? Most of us would disagree isn't ? Well in this digital era where most of the things are getting digitized if wealth management/risk management is digitized too then it can certainly be leveraged by a wider population. Moreover the one who has 10 lacs today would have 50 lacs 4-5 years down the line and if they starts making right investment decision now the journey can only get quicker. Also another thing which is also quite popular is – stocks are our door to long term wealth creation where we can easily beat inflation conditional to picking the right opportunities from the right sectors and managing the risk on an ongoing basis.

So what do we need to be our own wealth managers ?

There are tools which helps us pick the right investment options and manage risk as our wealth starts multiplying and also helping us upgrade both in terms of risk as well as return. Now without delving more into the philosophy lets look at one such tool.

In order to create a basket of stocks which is well diversified as well as suited for our risk appetite what we need is to define three criteria( Generic, Entry and Exit). Here is how we go about doing it.

Choosing Generic Criteria –

This is about selecting – how many stocks we want in our portfolio, maximum number of stocks from a particular industry, whether we want to reinvest our profit or not and finally the frequency we would like to rebalance our portfolio. This is how it looks for the case of 25 stocks, 12 stocks per industry, quarterly rebalance frequency and reinvestment set to true. Easy thus far isn’t ?

Defining Entry criteria – How do I pick good stocks ? Well then we need to understand technical, fundamental, industry analysis but then experts have already done it, we selecting stocks with a buy rating ( which includes technical and fundamental and market sentiments) of 60-100% makes sense. Lets pick only the fundamentally “Good” stocks and also fundamentally “Good” Industries(Industries showing improvements in their financials and are in an uptrend). Selecting the risk range is critical as choosing a very high range can bring in highly volatile stocks in our portfolio. Typically suggested range is –> 0-25% vol for conservative investors, 25-45% for moderate investors and 45% above for aggressive investors. Here is how it looks –

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Defining Exit Criteria –

This is the most tricky part of the puzzle, usually when we buy some stocks we get attached to it and don’t sell even when the signals are not right. And that is where some clear rules needs to be set around booking profit, setting stop loss and leveraging the various technical indicators. Here is how it looks for a sell rating of 60% and above, booking profit at 35% at individual stock level with a trailing stop loss of 10%

?Backtesting -

Once you have defined our criteria we can run backtest/simulate to see how it would have done over the different time horizon. We can now fine tune a few parameters to zero in on a particular risk, market cap, return, rebalancing frequency. Here is how the result looks -

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And we are now live with our first well diversified, risk managed basket of stocks which beats index (Nifty) by a whooping 15 % on an yearly basis.

Wasn’t it easy .. it appeared so. The difficult part is to follow the signals in a methodical way without getting attached to any stock. This method to the madness would help you ride the volatility of the market with ease and your trust in capital markets is only going to improve.

Explore for yourself. Reach out to [email protected] if you need a free trial to this awesome tool.

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