How to Build an Equity Portfolio

If you are new to equity (Stocks) investments and are not sure on how to build an equity portfolio, then this post is for you. 

We can see this post as a natural extension of the “Building Wealth” series, as having a solid equity portfolio is the core of building wealth.

When it comes to equity investment, we should remember a couple of things. 

1. We should be investing in the stock market only with the money that we do not need for at least another 5 years. The stock market is very volatile. No one can predict the market movements in the short term. The only thing that we know is that the market has high chances of going up in the long term. That is all. So we should not invest the money that we would need in the short term in the stock market.
   
2. The chances of us beating the Index by investing in individual stocks are very slim. Not even 1 person in 100 can do that consistently. So, avoid investing in individual stocks as much as possible. I am not discouraging you from investing in individual stocks. But if you are doing it, know your chances of consistently beating the index. 

Risk Profiles

Even though we all have the same goal of adding equity exposure to our portfolio, our individual risk profiles are very different. Not everyone can follow the same template, as that would lead to disastrous results.

A low risk individual who would prefer to have least volatility in their portfolio should avoid following any high risk strategy. Investing in wrong risk profile will lead to making wrong decisions at the wrong time, hurting the growth of our portfolio.

That is why it is very important to understand our risk profile and then build a portfolio based on that.

At a high level, we can categorize risk profiles into Conservative, Moderate and Aggressive.

1. Conservative Equity Portfolio

When it comes to investment, conservative means having less exposure to risky assets and having more exposure to safer assets. But the “conservative” here refers to investing 100% in equity investments but with minimal volatility. 

People who are new to stock market investing or who do not have time to monitor the market closely should invest conservatively. A salaried employee who is working full time should consider investing in the conservative category. 

Conservative Portfolio for India

If you are in India, you can consider the following two index funds for conservative category. 

• India’s Nifty 50 Index – 50%
• US’ Total Stock Market Index – 50%

Nifty 50 is the best index in India. The top 50 companies in India are in this index. Because India is a developing country and an emerging market, India’s growth can be expected to be greater than that of any developed countries. We can see the Nifty 50 Index as a proxy to India’s growth.

So if you believe in the growth of India, you can definitely believe in Nifty 50. On average, we can expect a return of around 11 to 13% from this index. On average does not mean that we can expect the return in this range every year. Stock market growth comes in sudden spurts rather than gradually. 

Many fund houses offer the Nifty 50 Index. Go with ones that you like most. If you need help reading a mutual fund prospectus, watch this episode. It is important that you choose a direct fund rather than a regular fund to avoid higher fees.

If you would like to invest only in India, you can choose to invest 100% in Nifty 50 Index. But if you would like to have the exposure of the biggest stock market in the world, you can invest 50% in US’ Total stock market index fund offered by Navi.

We gain two advantages by investing in US stock market.

1. Getting exposure to world’s best companies like Apple, Google, Tesla etc.
2. Protection from Indian Rupees depreciation as the growth of US funds will be in US dollars. Even though the US market gives a return of 10 to 12% on average, it would become a 13 to 15% return in Indian Rupees. 

We can expect an average return of 12 to 14% from this conservative portfolio. 

Conservative Portfolio for USA

If you are in the US, you can buy just this one fund – Vanguard Total Stock Market Index (VTI/VTSAX) for the conservative category. There are around 3500 US companies in this index.

The guru of Index investing, John Bogle, once famously said, “Why search for a needle in a haystack when you can buy the whole haystack?” That is, instead of searching for the best performing stock, why not buy the whole market? This fund (VTI/VTSAX) is the best fund for conservative investors. On average, we can expect a return of 10 to 12% from this fund. 

When it comes to equity investments, the conservative category has the least risk. It is a no brainer approach as we do not have to put that much effort in constructing or maintaining this portfolio. Whenever we have money to invest, we can just continue to invest in this conservative portfolio consistently. It is as simple as that.

That is why this is called the “Lazy Portfolio” in the market. If I had to recommend a portfolio to anyone, I would recommend this one. When compared to other assets, this one has the least risk with the greatest return potential.

Do not underestimate the risk on this portfolio just because it has minimal risk. During recession times, there are chances for this portfolio to go down by 50% or more. But as we saw in the “Recession” episode, that will eventually pass as well. 

2. Moderate Equity Portfolio

If you are willing take on more risk than a conservative investor for potential higher returns, then you can consider this moderate portfolio. 

But in this portfolio, the growth won’t be as smooth as in a conservative portfolio. We have to expect the ride to be a bit rough. That is, the value of this portfolio goes up and down more as it will have higher volatility. But the chances of this portfolio beating a conservative portfolio in the long term is higher.

Moderate Portfolio for India

• India’s Nifty 50 – 30%
• A managed fund – 30% 
• US Nasdaq 100 – 40%

We can have 30% of Nifty 50 instead of the 50% in Conservative portfolio. Another 30% can be in a managed fund like Parag Parikh Flexicap or Canara Robeca Emerging Equities. Before buying a managed fund, we have to make sure that it has beaten the Index consistently in the long term, like in 5 to 10 years. Again, we need to be sure that we are buying the direct version of these funds to have minimal fees (expense ratio).

For US market exposure, the aggressive Nasdaq 100 can be bought for 40% instead of US total stock market index. The Nasdaq 100 index is top 100 non financial companies in US, with higher weightage to Technology sector. Nasdaq 100 has performed wonderfully in the last 10 years. On average, it has given a return of 16%. This growth has a good chance to continue into next decade as well. So we can expect a growth of 16 to 19% from Nasdaq in Indian rupees.

Watch this episode if you would like to understand the difference between S&P 500 and Nasdaq 100.

These percentages of allocation are just suggestions. You can adjust it to your comfort. We can expect a return of around 15 to 17% on average from this portfolio. 

Moderate Portfolio for USA

For a moderate portfolio, US folks can reduce the total stock market index to 60%, and invest the rest in Nasdaq 100 Index ETF like QQQ. QQQ has given an average return of 16% in last 10 years. 

Another option is to invest that 40% in Vanguard’s Technology Index – VGT. This one has around 350 companies compared to 100 in Nasdaq 100. But VGT has pure Technology companies though highly diversified within Technology. Nasdaq 100, on the other hand, has 50% exposure to Technology.

Depending on your risk tolerance and your sector preference, you can choose between VGT and QQQ or choose both.

On average, we can expect a return of around 13 to 14% from this portfolio.

3. Aggressive Equity Portfolio

If you are new to stock market investing, don’t even think about this category. Only people with at least 5 years of experience should consider this category. We need a deep understanding of the stock market to invest in this category.

We should have the knowledge of how different market sectors react in different economic situations to invest in this category. If we invest in the aggressive category without that knowledge, we will end up burning our fingers. So be mindful before venturing into this.

Another requirement for this category is that we have a complete understanding of the risk, as this one has the maximum risk. We should know how much additional risk we are taking before investing aggressively.

It is one thing to say that I can easily handle my portfolio going down by 50%, but it is totally a different thing to handle that when it actually happens. 99% of us cannot handle it. But 80% of us believe that we can.

So ask yourself this question. If your portfolio goes down from 1 Crore to 50 Lakhs in one month, what would be your reaction? If you believe that you can be normal, then you can invest aggressively. But if you say that you will lose your sleep over this, then sorry – you should not be investing in this category at all. 

Portfolio recommendation is not needed for folks in this category. They would already know about it. If you are expecting a recommendation for this category, then that by itself tells you, that you are not ready for this category yet. 

That is all to it in building a solid equity portfolio for long term investment. Good Luck!

Also, if you would like to know more about other good ETFs available in US market, you can check out this link. 

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