Part 5: Process or How the heck do I Invest in Equity Successfully?

5.11 Manage your portfolio like a fish tank - Part 1

How do you manage your portfolio to earn the expected returns while managing risk? How do you ensure it is meaningfully diversified across asset classes and across different categories of stocks? How do you provide for goals during different market conditions without losing on returns? What can managing a fish-tank teach you about managing your portfolio effectively?

I know you have spent a lot of time and energy in reading this book. Everything we have learnt to do and I hope you have started doing it, is about investing your money and building a portfolio. But to earn the expected returns you also need to manage your portfolio effectively. It’s not a buy it and forget it game. Equally it is not a watch-the-price-ticker-and-react game. What you will see in this chapter is the process to manage your portfolio to get results without anxiety.

In fact, everything you have learnt in this section is towards ensuring you do things that don’t create anxiety – invest only in very good quality stocks at reasonable prices, build your portfolio with Core and Booster stocks to have stability and steady compounding combined with the possibility of earning enhanced returns. With this you would have done many things right. So, what remains is managing your portfolio. What does this mean exactly?

I don’t know if you have ever had a fish tank, if you did you will understand the huge similarities managing a fish tank has with managing a portfolio right away. If you’ve never had fish tank, you will still get it.

Having a Fish Tank or aquarium at home is the 3rd most popular pet after dogs and cats in USA. It has similar stress-reducing benefits. That’s why they are very often found in hospitals, doctors and dental clinics. But I am not promoting this pet or pet industry here, so let me jump straight into what it teaches about managing a portfolio.

Lesson #1: A Fish Tank is an ecosystem where fishes can live and thrive. Your portfolio is the tank and stocks are the fishes. I want you to remember that the goal, the objective of your portfolio management is to ensure your stocks grow and thrive because that’s what leads to earning inflation-beating returns and reaching your financial goals.

Lesson #2: The tank is designed and built so that it never leaks. In the same way, your portfolio is not something you use like your saving accounts, withdrawing money whenever you need it. The money that is in your portfolio is not to be touched, no, not even during emergencies for which you have your emergency fund and health insurance. It is to be used to fund your goals. This ensures your investments get the time to compound without any break whatsoever. That’s what creates the magic.

Lesson #3: Fishes cannot survive without water. Debt or Fixed Income investment is the water. It’s not interesting but no portfolio can survive with this. The long-term health of your Fish Tank ecosystem depends on having the right balance between the...........Read More

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