Why you shouldn't micromanage your investments

Investing can be likened to a team sport. Let's take a game of cricket to understand this better.

In a cricket match, a player scoring a century could lead their team to victory. However, winning is not guaranteed without the contribution of every player on the team. While a few missed catches or low scores will always be part of the game, what matters is the final result.

The same rule applies to your portfolio. Consider your portfolio as a team, where each stock contributes towards long-term wealth generation. Though there might be periods where some stocks underperform or don't generate positive returns, it doesn't necessarily mean that they shouldn't be in your portfolio.

This brings us to the essence of this article - don't zoom in on individual stocks . Rather, develop a portfolio perspective.

The purpose of building an investment portfolio is wealth creation. While there might be times when certain stocks may deliver low returns, your focus should be on the bigger picture. That is, you should track the overall returns earned by your portfolio over fixating on the performance of individual stocks.

Overcoming the micromanagement trap

To prove why overfocusing on the returns of a single stock can be detrimental to your investments, we constructed 10 portfolios and classified them into three broad categories:

1. Portfolios based on market capitalisation
With the help of Value Research's market cap categorisation, large-cap, mid-cap, small-cap and multi-cap portfolios were created by taking the top 15 companies from each category as of January 1, 2014:

• Large-cap portfolio - Market cap greater than Rs 24,500 crore
  
• Mid-cap portfolio - Market cap ranging between Rs 24,500 crore and Rs 3,800 crore
  
• Small-cap portfolio - Market cap between Rs 3,800 crore and Rs 260 crore
  
• Multi-cap portfolio - The top five companies each from large cap, mid-cap and small cap

2. Portfolios based on Stock Ratings
Using our recently launched Stock Ratings tool, we built five different portfolios based on growth at a reasonable price (GARP), high quality at a reasonable price, fast-growing mid and small caps, small caps high on quality and growth and quality at any price.

The GARP portfolio was constructed by taking historical Stock Ratings as of FY14 and applying the following filters:

• Growth score greater than or equal to seven
  
• Valuation score greater than or equal to three
  
• Quality score greater than five

3. Portfolio based on PAT growth
Lastly, the 'Three-year PAT growth' portfolio was built by picking companies with a market cap greater than Rs 500 crore and the highest three-year PAT (profit after tax) growth as of FY14.

Interestingly, these 10 portfolios were held for a decade without any churning. You will be surprised to see how they performed over the years.

A few bad apples will not damage your portfolio

From the 1o portfolios we created, there were some that delivered high returns over the 10-year period despite the presence of 'wealth-destroyers'. Let's look at some of them.

• In the 'Quality at any price' portfolio, stocks like Kaveri Seed Company and Lupin gave measly returns of 5 and 4 per cent, respectively
  
• Under the 'Small cap' portfolio, Tilak Ventures and Mcleod Russel India gave negative returns of -32 and -22 per cent, respectively
  
• In 'Fast growing mid and small caps', Yes Bank was among the poorest performers, delivering -12 per cent annual returns

Further, each portfolio had at least one stock that did not compound at more than 10 per cent per annum. For instance, the 'Quality at any price' portfolio held 36 per cent of the companies compounding at less than 10 per cent per annum. Yet, it gave a whopping 28 per cent return per annum over the last ten years.

Our take

Creating a successful investment portfolio takes time. Thus, staying patient and investing for the long term is best.

The next time you decide to sell off any stocks, remember to look at the portfolio as a whole. While there might be times when a few stocks won't make any money, one must remember that holding high-quality stocks with solid financials has always been the proven mantra for long-term success in the stock market.

Also read: How to build a lean, mean, profit generating machine