Portfolio Types like Headlamp Types

(Image Credits: Team BHP)

The headlamps of vehicles come in 2 varieties, one is reflector types and other one is projector type. In reflector type the reflector reflects light falling on it, by light source. The light source is infront of it, and reflector arrangement is nothing but concave mirrors sitting behind the light source. They reflect light falling onto road, giving illumination for the rider. In case of projector beams they instead of reflecting, concentrate the beam onto road. Here instead of mirror a lens is used. The lens makes it important for the light source to be behind it. These 2 are major lighting techs we have.  Similar to these lighting types we do have portfolio types mimicking them. You can call these as diversified folio and other as concentrated folio.

Portfolio Types: Diversified Folio

Like the name suggests, In diversified type portfolio each stock you select has bearing on performance of the folio. Like reflectors which is nothing but set of mirrors aligned in particular fashion, each selected stock has its impact on folio.  In reflectors placement of mirrors has bearing on where light will fall. Similarly individual weights matters in diversified folio. The diversified folio places too much emphasis on selecting a stock and weight assigned to it. If one is able to get good set of stocks and able to assign proper amount of weights to it, he will be able to get decent gains from this folio. Failing it – will make a subject of mimic in office. Most investors normally fall in this category, and fail it too. And by far this is very difficult thing to do also as one needs to keep a close eye on weights of all the stocks.

Portfolio Types: Concentrated Folio

In this folio, you select the universe/market/index first. In a projection beam its the light source which is chosen first. Once the universe is chosen, you run a formula on it based on your criteria. In a projection beam where it is focused matters most. Similarly what kind of theme you are focusing matters most for the formula. If the lens is small, and shortlisting criteria is too tight, then lesser light is coming out, hence lesser stocks to invest is coming out. If lens is too large, then out coming light is spread too thinly. Similarly if formula is too lenient, it will throw out a large number of stocks, which wont have any meaningful concentration in portfolio performance.

A simple thumb rule to know folio type is, if you are able to define theme of a portfolio with ease, then the folio constructed by you is concentrated one. For example, if one is constructing folio on faster growth sectors of past 2 years then that list will not include HDFC Bank, as banking sector has lots of duds which bring its performance down compared to other 4 growth sectors namely FMCG, Auto, Pharma and IT (PS: Sectors referred here are lifted from Nifty Growth Sector Index, which is an index which focuses on fastest growing sectoral indices and picks top 4 sectors).

Conclusion:

Here I have explained to you the 2 broad ways to select stocks. The thing with both is, they are mutually exclusive. If you are picking stocks individually then your folio is a diversified one, if you are using screener with a formula then your folio is a concentrated theme based folio. Failed diversified folio are called as Dhobi list folios. Failed concentrated folio ca be called as burnt theme. Hope you have done proper homework while investing otherwise you can share your investment experience on AIFW, serving as reminder of being a pig.