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How To Construct A High-Risk Portfolio

 Courtesy : Investopedia

A lot of investment advice centers on producing as much return as possible for as little risk as possible. But what about the other side of the coin? What about embracing the possibilities of risk and actively seeking to build a high-risk investment portfolio? Such a portfolio could hold considerable promise for market-beating returns, but investors need to keep a few ideas in mind when approaching this type of investment portfolio.



Why Seek Risk?

The linkage between risk and reward is not always perfect or predictable, but there is a time-tested correlation between risk and reward. If investors want higher returns, they have to be willing to take on higher risk. Said differently, though, if an investor can accept higher risk, he or she can also potentially realize considerably higher returns.
A low-risk/high-return portfolio is more often about fantasy (or fraud) than reality. Moreover, not all risk is bad for an individual investor. The key, then, is taking on the right risks. After all, risk only becomes problematic if, or when, an investor is wrong. There are also different ideas of risk; holding an all-cash portfolio is actually quite risky if that cash is being eroded by inflation. 

Large institutions cannot afford the risks that go with low liquidity, but that threshold is much lower for an individual. Even a small fund may be unable to invest in a $20 stock that trades 50,000 shares a day, but there is no reason that an individual investor cannot take on that liquidity risk. Likewise, many institutional investors cannot invest in low-priced stocks, pink sheet/bulletin board stocks or stocks in certain industries (particularly for certain ethical funds), but individuals have no such statutory restrictions.

It is also important to understand another key detail of "high-risk" portfolios – volatility is NOT risk. True, many academics and market participants do use volatility as a proxy for risk (beta, for instance), but in many respects volatility is a poor analog to risk. Risk, as most investors would define it, is either the probability of loss or the probability of an asset (or collection of assets) providing less than the expected return. 
Some stocks can go through wild up and down swings, but still produce handsome rewards for investors. In other cases some stocks just quietly and steadily fade into oblivion. In many respects, then, volatility is like the turbulence experienced on a plane ride, whereas risk is the actual chance of crashing.

Seek Out Smart Risk / Not All Risk Is the Same

One of the most important concepts in building a high-risk portfolio is that not all risk is the same. A close corollary is that investors should only seek out the smart risks, the risks they get compensated for taking. For instance, investing in the equity of bankrupt companies almost never pays off; yes the stocks trade for pennies and the companies often survive, but the bankruptcy process almost always completely wipes out equity investors and there is not enough wiggle room in that "almost" to validate the risk.
Investors should also guard against laziness and complacency. High-risk investing demands responsiveness and attention to detail. So while building a portfolio without thorough due diligence and then ignoring it is certainly high-risk investing, it is not a kind of risk that will earn extra rewards.

Types of High-Risk Portfolios

Concentrated

It is possible to create a high-risk portfolio without really changing investment styles. Heavily investing in a single sector/industry can certainly amp up risk and increase return potential. Investors who over weighted into technology stocks during the late 1990s (and got out in time) did quite well, as well as investors who successfully play cyclical commodity runs.
Perhaps it goes without saying, but this strategy is predicated on really understanding an industry well and having a good sense of the industry's place in the business cycle. Likewise, it is important to have a good sense of market psychology and moods; over weighting an unpopular sector is not likely to boost returns.  

Momentum investing - is another option for a high-risk portfolio. The basic idea of momentum investing is to invest in stocks already showing strong price action. The risk from this strategy is often due to the above-average valuations that popular stocks carry, but expensive popular stocks can often trade up to "very expensive" or "extremely expensive" before fading.
Momentum investing requires strong sell discipline (using tight stop-losses when momentum fades, for instance). Investors can also look to diversify across sectors to lower absolute risk, but a general market decline will hit a momentum portfolio hard unless an investor is nimble enough to go short. 

Penny Stocks

Most financial information sites go to great lengths to dissuade investors from investing in penny stocks, highlighting the prevalence of fraud, corruption, and hype as well as the overall illiquidity of these stocks.
While those are valid issues, some times the enormous risks of this investment type do pay off. Penny stock investing requires exceptional commitment to due diligence, and diversification can help reduce the risks.

Emerging Ideas

Risk-seeking investors can also take a page from venture capital and look to invest in emerging technology companies. At their best, these companies can give investors something close to a "ground floor" opportunity in new technologies and products. Once again diversification matters, as investors have to be patient and willing to accept a low "batting average", as most emerging technology companies fail. Investors should also focus on companies that have capital and/or access to capital on good terms as many of these companies are pre-revenue and torrid cash-burners.


Bottom LineInvestors with the financial capacity to take on risk should not shy away from it. Over time, intelligent and disciplined risk-seeking behavior can produce substantially above-average returns. The key, though, is "intelligent" and "disciplined"; investors must seek out the risks that can earn them better returns and strictly avoid (or minimize) those risks that do not add any money to their pocket.

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How to book stock market losses and make money

Courtesy : Rediff.com

Booking losses at the right time forms the most important part of wealth management strategy.

Do you book profit or book loss?

You have bought the shares of ABC Ltd at a rate of Rs.100 per share. The current market price is Rs.150 per share. Also you have bought the shares of XYZ Ltd at a rate of Rs.200 and the current market price is Rs 125.

Do you book profits by selling ABC or book losses by selling XYZ.

Rule No.1: Never lose money. Rule No.2: Never forget rule No.1: Warren Buffett

This quote from Warren Buffet is the essenceof selling loss-making investments as part of wealth management. However, to the contrary, most of us tend to sell those investments that make us money and prefer to hold on to those that are already making losses.It is just probably a feeling that we could not have gone wrong and the investment would revive, or on the other hand a feeling that we have been fooled and do not want to be fooled again and do not want to take action.

What to do with loss making investments?

" It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong" - George Soros

I recollected this saying when an investor told me that he always invested in right investments at the right time. I acknowledged his prudent nature, but felt that he and many other financially prudent persons needed to know that they also required to regularly review their investments to eliminate non-productive ones for productive and paying ones.
Wealth management is all about making money work best for you.
George Soros's lessons of prudent wealth management lie in not allowing your investment to depreciate (fall in value).This involves being ready toleave your comfort zone and revise your investment decision with the right attitude of being proud of the right investment and at the same time not being disgraced or regretful in making revisions or corrections in decisions already made.

Review your investments with the current outlook

Most of us make investments that are based on the information available to us at a given point in time. But it is important to know that with times the profitability or loss of an investment could change. It definitely proves useful to review and revise our decisions when we find that we are holding on to something that no one would buy or invest in now.
It is right that it is human to make mistakes, but holding on to a mistake just for emotional reasons cannot be pardoned. Subsequent events might alter the attractiveness of the investment.
Should we be possessive in our attachment to those investments for which the outlook has changed now? So I would say that if you need to create wealth and manage it, there is nothing wrong in being a fair weather friend; investments have to work for you and not accomplishing this goal means getting out of these investments for better avenues.

Do I need to book losses when the market is falling?

However I wish to be excused when I say it is not good to sell when the prices on the whole have fallen down. However it is again important to believe that poor stocks would surely be losing more than good ones; fall in price just does not indicate a downturn, it is a combination of various factors like production, sales and profits also; so poor stocks or small companies may find it difficult to recoup even when we experience favorable times in the market.
Again during the fall in the market it is common for us to see that even good stocks may be available at a discount. I would say such times are ideal to liquidate poor performing stocks that are not doing well and purchase good stocks.

Why should you book loss?

Booking losses in poor performing investments has got some advantages. So as to quit the poor performing investments, you are forced to quit your ego and admit that you have made a wrong investment decision.
As you admit your mistake, you learn a lesson. As you learn a lesson you do not take similar wrong investment decisions in the future.
The advantage of booking losses is you move out of poor performing investments and moving into better performing investments. So you will be able to recover your losses faster.

How to Get Tax Gains from Your Losses in Shares

Courtesy : NDTV

 For the purpose of tax computation of total income of an individual, all incomes are classified under five heads, under the Income Tax Act: salary, income from house property, income from business or profession, capital gains and income from other sources. The total income under all these five heads of income are added and after allowing deductions the total income tax is calculated based on the tax slabs.

However, tax laws allow setting off of losses against gains in the same category, based on different criteria. If an income is tax-exempt, it however cannot be adjusted against any loss from an income that is taxable. For tax computation, profit or losses in shares are clubbed under the head of capital gains.

If an investor has held shares for less than 12 months from the date of buying, then the resulting loss on its transaction on stock exchanges, if any, is termed as short-term capital loss (STCL).

This loss can be adjusted against the short-term capital gain (STCG) or long-term capital gain (LTCG) from shares, if any, thus lowering the tax outgo. Short-term capital gains from equities are taxed at 15 per cent. (If an investor has held shares for more than 12 months, then the resulting gain/loss is termed long-term capital gain/loss.)

If the short-term loss cannot be set off in the same fiscal, then the balance can be carried forward to subsequent eight years. In each of these, the said short-term losses can be set-off against short-term capital gain (STCG) or long-term capital gain, if any.

To reduce outgo, many investors set off gains made from equities in the fiscal against losses occurred in same year or previous year. They book losses, if any, on existing holdings and then later repurchase the stock to keep their holdings intact.

For example, an investor has already booked short-term profit (by selling within 12 months) of Rs. 10,000 in some stocks. At the same time, the investor is sitting on un-realized loss of Rs. 4,000 in some other stocks.

In that case, the investor has to pay short-term capital gains tax at 15 per cent on Rs. 10,000 profit. To reduce short-term capital gains tax liability, the investor can sell the stock on which he is incurring Rs. 4,000 of losses. In that case, the investor's has to pay tax on Rs. 6,000 (Rs. 10,000 - Rs. 4,000), not Rs. 10,000. To keep his holding intact, the investor can later repurchase the stock.

However, long-term capital losses on shares can only be set off against long-term capital gains, if any. Further, any long-term capital losses that cannot be set off against long-term capital gains arising in the same fiscal can be carried forward to subsequent eight years.

Disclaimer: "Investors are advised to make their own assessment and counter checks before acting on the information. - Tax Rules are subject to changes "

 

5 Popular Portfolio Types

Courtesy : Investopedia

Stock investors constantly hear the wisdom of diversification. The concept is to simply not put all of your eggs in one basket, which in turn helps mitigate risk, and generally leads to better performance or return on investment. Diversifying your hard-earned dollars does make sense, but there are different ways of diversifying, and there are different portfolio types. We look at the following portfolio types and suggest how to get started building them: aggressive, defensive, income, speculative and hybrid. It is important to understand that building a portfolio will require research and some effort. Having said that, let's have a peek across our five portfolios to gain a better understanding of each and get you started.

The Aggressive Portfolio
 
An aggressive portfolio or basket of stocks includes those stocks with high risk/high reward proposition. Stocks in the category typically have a high beta, or sensitivity to the overall market. Higher beta stocks experience larger fluctuations relative to the overall market on a consistent basis. If your individual stock has a beta of 2.0, it will typically move twice as much in either direction to the overall market - hence, the high-risk, high-reward description.
Most aggressive stocks (and therefore companies) are in the early stages of growth, and have a unique value proposition. Building an aggressive portfolio requires an investor who is willing to seek out such companies, because most of these names, with a few exceptions, are not going to be common household companies. Look online for companies with earnings growth that is rapidly accelerating, and have not been discovered by Wall Street. The most common sectors to scrutinize would be technology, but many other firms in various sectors that are pursuing an aggressive growth strategy can be considered. As you might have gathered, risk management becomes very important when building and maintaining an aggressive portfolio. Keeping losses to a minimum and taking profit are keys to success in this type of portfolio.

The Defensive Portfolio
 
Defensive stocks do not usually carry a high beta, and usually are fairly isolated from broad market movements. Cyclical stocks, on the other hand, are those that are most sensitive to the underlying economic "business cycle." For example, during recessionary times, companies that make the "basics" tend to do better than those that are focused on fads or luxuries. Despite how bad the economy is, companies that make products essential to everyday life will survive. Think of the essentials in your everyday life, and then find the companies that make these consumer staple products.
The opportunity of buying cyclical stocks is that they offer an extra level of protection against detrimental events. Just listen to the business stations and you will hear portfolios managers talking about "drugs," "defense" and "tobacco." These really are just baskets of stocks that these managers are recommending based upon where the business cycle is and where they think it is going. However, the products and services of these companies are in constant demand. A defensive portfolio is prudent for most investors. A lot of these companies offer a dividend as well which helps minimize downside capital losses.

The Income Portfolio
An income portfolio focuses on making money through dividends or other types of distributions to stakeholders. These companies are somewhat like the safe defensive stocks but should offer higher yields. An income portfolio should generate positive cash flow. Real estate investment trusts (REITs) and master limited partnerships (MLP) are excellent sources of income producing investments. These companies return a great majority of their profits back to shareholders in exchange for favorable tax status. REITs are an easy way to invest in real estate without the hassles of owning real property. Keep in mind, however, that these stocks are also subject to the economic climate. REITs are groups of stocks that take a beating during an economic downturn, as building and buying activity dries up.
An income portfolio is a nice complement to most people's paycheck or other retirement income. Investors should be on the lookout for stocks that have fallen out of favor and have still maintained a high dividend policy. These are the companies that can not only supplement income but also provide capital gains. Utilities and other slow growth industries are an ideal place to start your search.


The Speculative Portfolio
 
A speculative portfolio is the closest to a pure gamble. A speculative portfolio presents more risk than any others discussed here. Finance gurus suggest that a maximum of 10% of one's investable assets be used to fund a speculative portfolio. Speculative "plays" could be initial public offerings (IPOs) or stocks that are rumored to be takeover targets. Technology or health care firms that are in the process of researching a breakthrough product, or a junior oil company which is about to release its initial production results, would also fall into this category.
Another classic speculative play is to make an investment decision based upon a rumor that the company is subject to a takeover. One could argue that the widespread popularity of leveraged ETFs in today's markets represent speculation. Again, these types of investments are alluring: picking the right one could lead to huge profits in a short amount of time. Speculation may be the one portfolio that, if done correctly, requires the most homework. Speculative stocks are typically trades, and not your classic "buy and hold" investment.

The Hybrid Portfolio
 
Building a hybrid type of portfolio means venturing into other investments, such as bonds, commodities, real estate and even art. Basically, there is a lot of flexibility in the hybrid portfolio approach. Traditionally, this type of portfolio would contain blue chip stocks and some high grade government or corporate bonds. REITs and MLPs may also be an investable theme for the balanced portfolio. A common fixed income investment strategy approach advocates buying bonds with various maturity dates, and is essentially a diversification approach within the bond asset class itself. Basically, a hybrid portfolio would include a mix of stocks and bonds in a relatively fixed allocation proportions. This type of approach offers diversification benefits across multiple asset classes as equities and fixed income securities tend to have a negative correlation with one another.
The Bottom Line
At the end of the day, investors should consider all of these portfolios and decide on the right allocation across all five. Here, we have laid the foundation by defining five of the more common types of portfolios. Building an investment portfolio does require more effort than a passive, index investing approach. By going it alone, you will be required to monitor your portfolio(s) and re-balance more frequently, thus racking up commission fees. Too much or too little exposure to any portfolio type introduces additional risks. Despite the extra required effort, defining and building a portfolio will increase your investing confidence, and give you control over your finances.

Stashing Your Cash: Mattress Or Market ?

Courtesy : Investopedia

When stock markets become volatile, investors get nervous. In many cases, this prompts them to take money out of the market and keep it in cash. Cash can be seen, felt and spent at will, and having money on hand makes many people feel more secure. But how safe is it really? Read on to find out whether your money is safer in the market or under your mattress.

All Hail Cash?
 There are definitely some benefits to holding cash. When the stock market is in free fall, holding cash helps you avoid further losses. Even if the stock market doesn't fall on a particular day, there is always the potential that it could have fallen. This possibility is known as systematic risk, and it can be completely avoided by holding cash. Cash is also psychologically soothing. During troubled times, you can see and touch cash. Unlike the rapidly dwindling balance in your portfolio, cash will still be in your pocket or in your bank account in the morning.
However, while moving to cash might feel good mentally and help you avoid short-term stock market volatility, it is unlikely to be a wise move over the long term. 

A Loss Is Not a Loss

When your money is in the stock market and the market is down, you may feel like you've lost money, but you really haven't. At this point, it's a paper loss. A turnaround in the market can put you right back to break even and maybe even put a profit in your pocket. If you sell your holdings and move to cash, you lock in your losses. They go from being paper losses to being real losses with no hope of recovery. While paper losses don't feel good, long-term investors accept that the stock market rises and falls. Maintaining your positions when the market is down is the only way that your portfolio will have a chance to benefit when the market rebounds.

Inflation Is a Cash Killer
 While having cash in your hand seems like a great way to stem your losses, cash is no defense against inflation. You think your money is safe when it's in cash, but over time, its value erodes. Inflation is less dramatic than a crash, but in some cases it can be more devastating to your portfolio in the long term. 


Opportunity Costs Add Up.
 
Opportunity cost is the cost of an alternative that must be forgone in order to pursue a certain action. Put another way, opportunity cost refers to the benefits you could have received by taking an alternative action. In the case of cash, taking your money out of the stock market requires that you compare the growth of your cash portfolio, which will be negative over the long term as inflation erodes your purchasing power, against the potential gains in the stock market. Historically, the stock market has been the better bet.

Time Is Money
 
When you sell your stocks and put your money in cash, odds are that you will eventually reinvest in the stock market. The question then becomes, "when should you make this move?" Trying to choose the right time to get in or out of the stock market is referred to as market timing. If you were unable to successfully predict the market's peak and sell, it is highly unlikely that you'll be any better at predicting its bottom and buying in just before it rises.


Common Sense Is King

Common sense may be the best argument against moving to cash, and selling your stocks after the market tanks means that you bought high and are selling low. That would be the exact opposite of a good investing strategy. While your instincts may be telling you to save what you have left, your instincts are in direct opposition with the most basic tenet of investing. The time to sell was back when your investments were in the black - not when you are deep in the red.

Buy and Hold on Tight.
 
You were happy to buy when the price was high because you expected it to go higher. Now that it is low, you expect it to fall forever. Look at the markets over time. They have historically gone up. Companies are in business to make money. They have a vested interest in profitability. Investing in equities should be a long-term endeavor, and the long term favors those who stay invested.Serious investors understand that the markets are no place for the faint of heart.

This is also the time to review the strength and weakness of our portfolio  and make necessary reshuffling to make it ready for next up move.Don't hesitate to sell the stock of a company in loss if we could find a better opportunity in another one considering the changing business environment.

The Ups And Downs Of Investing In Cyclical Stocks

Courtesy : Investopedia


Imagine being on a Ferris wheel: one minute you're on top of the world, the next you're at the bottom - and eager to head back up again. Investing in cyclical companies is much the same, except the the time it takes to go up and down, known as a business cycle, can last years.
What Are Cyclical Stocks?Identifying these companies is fairly straightforward. They often exist along industry lines. Automobile manufacturers, airlines, furniture, steel, paper, heavy machinery, hotels and expensive restaurants are the best examples. Profits and share prices of cyclical companies tend to follow the up and downs of the economy; that's why they are called cyclicals. When the economy booms, as it did in the go-go '90s, sales of things like cars, plane tickets and fine wines tend to thrive. On the other hand, cyclicals are prone to suffer in economic downturns. 

Given the up-and-down nature of the economy and, consequently, that of cyclical stocks, successful cyclical investing requires careful timing. It is possible to make a lot of money if you time your way into these stocks at the bottom of a down cycle just ahead of an upturn. But investors can also lose substantial amounts if they buy at the wrong point in the cycle. 

Comparing Cyclicals to Growth Stocks

All companies do better when the economy is growing, but good growth companies, even in the worst  conditions, still manage to turn in increased earnings per share year after year. In a downturn, growth for these companies may be slower than their long-term average, but it will still be an enduring feature.
Cyclicals, by contrast, respond more violently than growth stocks to economic changes. They can suffer mammoth losses during severe recessions and can have a hard time surviving until the next boom. But, when things do start to change for the better, dramatic swings from losses to profits can often far surpass expectations. Performance can even outpace growth stocks by a wide margin.

Investing in Cyclicals
 
So, when does it pay to buy them? Predicting an upswing can be awfully difficult, especially since many cyclical stocks start doing well many months before the economy comes out of a recession. Buying requires research and courage. On top of that, investors must get their timing perfect.
Investment guru Jim Slater offers investors some help. He studied how cyclical industries fared against key economic variables over a 15-year period. Data showed that falling interest rates are a key factor behind cyclicals' most successful years. Since falling rates normally stimulate the economy, cyclical stocks fare best when interest rates are falling. Conversely, in times of rising interest rates, cyclical stocks fare poorly. But Slater warns us to be careful: the first year of falling interest rates is also unlikely to be the right time to buy. He advises that it's best to buy in the last year of falling interest rates, just before they begin to rise again. This is when cyclicals tend to outperform growth stocks.

Before selecting a cyclical stock, it makes sense to pick an industry that is due for a bounce. In that industry, choose companies that look especially attractive. The biggest companies are often the safest. Smaller companies carry more risk, but they can also produce the most impressive returns.
Many investors look for companies with low P/E multiples, but for investing in cyclical stocks this strategy may not work well. Earnings of cyclical stocks fluctuate too much to make P/E a meaningful measure; moreover, cyclicals with low P/E multiples can frequently turn out to be a dangerous investment. A high P/E normally marks the bottom of the cycle, whereas a low multiple often signals the end of an upturn.

For investing in cyclicals, price-to-book multiples are better to use than the P/E. Prices at a discount to the book value offer an encouraging sign of future recovery. But when recovery is already well underway, these stocks typically fetch several times the book value. For instance, at the peak of a cycle, semiconductor manufacturers trade at three or four times book value.
Correct investment timing differs among cyclical sectors. Petrochemicals, cement, pulp and paper, and the like tend to move higher first. Once the recovery looks more certain, cyclical technology stocks, like semiconductors, normally follow. Tagging along near the end of the cycle are usually consumer companies, such as clothing stores, auto makers and airlines.

Insider buying, arguably, offers the strongest signal to buy. If a company is at the bottom of its cycle, directors and senior management will, by purchasing stock, demonstrate their confidence in the company fully recovering.

Finally, keep a close eye on the company's balance sheet. A strong cash position can be very important, especially for investors who buy recovery stocks at the very bottom, where economic conditions are still poor. The company having plenty of cash gives these investors more time to confirm whether their strategy wisdom was a wise one.

Conclusion
Don't rely on cyclicals for long-term gains. If the economic outlook seems bleak, investors should be ready to unload cyclicals before these stocks tumble and end up back where they started. Investors stuck with cyclicals during a recession might have to wait five, 10 or even 15 years before these stocks return to the value they once had. Cyclicals make lousy buy-and-hold investments.

SKM EGG PRODUCTS EXPORT (INDIA) LTD - RESULT UPDATE

Company reported its December quarter and Nine months result as follows