We’ve all seen the resilience of Rahul Dravid. Just like he stays on the pitch, facing deliveries from the best pacers worldwide, he rarely gives his wicket to a rash shot. He remains calm and composed, a perfect fit for test matches. Dravid stands at the crease, waits for that one lousy delivery, and scores on that ball. On the other hand, there’s Virender Sehwag. From the moment he steps onto the pitch, he’s ready to smack every ball out of the park, an absolute embodiment of the “go big or go home” attitude.
These different approaches made the Indian batting lineup diverse. It had both aggression and defense, two aspects that complete a team. This diversity in strategy highlights the importance of having a varied approach to success in both sports and the stock market. However, when we talk about taking a high-growth approach to investing, you must consider the risk associated with it and ways to mitigate it. So, which type of portfolio can help us achieve the high-growth aim calculatively?
Types of High-Growth and High-Risk Portfolios:
If you are aiming to build a portfolio with high-growth stocks, you can opt for any of the following portfolio models-
- Growth Model:
The growth model focuses on a portfolio filled mostly with stocks, expecting them to appreciate over time and provide long-term financial potential. Because of this stock-heavy focus, you need to be prepared for frequent short-term price fluctuations. This model suits you if you have a high-risk tolerance and a long-term investment horizon. In this, the possible splits and their risk factors can be as follows-
| Asset Allocation (Stocks / Bonds) | Average Annual Return | Best Year Returns | Worst Year Losses | Standard Deviation | Sharpe Ratio |
| 70% / 30% | 13.90% | 57.50% | -28.90% | 20.90% | 33.3 |
| 80% / 20% | 14.30% | 65.40% | -36.50% | 24.20% | 30.2 |
| 90% / 10% | 14.50% | 74.30% | -44.20% | 27.50% | 27.4 |
| 100% / 0% | 14.60% | 83.30% | -51.80% | 30.90% | 24.7 |
(The table is based on historical data as of February 2024)
Higher stock allocations lead to higher average returns but also increased volatility, reflecting the risk-return trade-off. Despite higher risk, portfolios with more stocks often have better risk-adjusted returns, shown by higher Sharpe ratios. However, with increased stock allocation, the worst possible downturns also became more extreme.
- Balanced Portfolio:
Balanced portfolios avoid strong biases toward equity or debt, making them ideal for long-term growth with moderate risk. They suit investors in the accumulation phase with stable incomes. The possible stocks and bonds allocations here can be 40:60, 50:50, or 60:40.
- Aggressive Model:
If you’re aiming for long-term growth over regular income or capital preservation, the aggressive model is for you. This approach suits investors with high-risk tolerance who can handle substantial value fluctuations. Like the growth model, it emphasizes stocks and global equities with a long-term perspective and often invests more in high-growth stocks in India.
Steps to Build a Balanced Portfolio with High-Growth Stock:
- Assessing Your Risk Tolerance:
Understanding your risk tolerance is crucial for long-term investment success. It helps determine the level of risk you’re comfortable with and influences your asset choices and portfolio structure. For instance, a retired investor might have a lower risk tolerance. They may prefer predictable, less volatile assets with limited growth potential but higher security and liquidity. On the other hand, a younger investor might aim for higher returns and be willing to accept greater price swings. Their portfolio would likely include higher-risk assets with significant growth potential, accepting short-term losses for long-term gains.
- Establishing Clear Investment Goals:
Identify your investment goals, such as capital growth, income production, and asset preservation. Defining your investment objectives helps in choosing the right strategies. For example, capital appreciation is an aggressive growth strategy suitable for high-growth portfolios.
- Asset Allocation Strategies:
Asset allocation involves dividing your portfolio across asset classes as per your risk tolerance, investment goals, and time horizon. A higher allocation to stocks in a high-growth portfolio offers the potential for higher returns but with more volatility. Conversely, allocating to bonds or cash, which are lower-risk, can provide more stability. Here, it is necessary to strike a balance between the two.
- Selecting High-Growth Investment Portfolios:
Choose asset groups or investments with a history of high returns. Small-cap stocks and investments in developing economies can offer substantial growth potential but come with increased volatility and risk. Consider assets like venture capital, cryptocurrencies, or high-risk/high-reward enterprises. And to balance the risk, you can opt for high-growth, low-risk options like ETFs and passively managed mutual funds that invest in growth stocks and indices.
- Research and Due Diligence:
Conduct thorough research on each investment. Analyze financial statements, performance metrics, and the competitive landscape. Evaluate the management team’s track record and expertise. Stay updated on market news and economic factors affecting your assets. For instance, a breakthrough drug announcement by a pharmaceutical company could influence your decision to hold or increase your investment.
- Risk Management Strategies:
Protect your portfolio using risk management techniques. Set stop-loss orders to limit potential losses, use derivatives or options to hedge against future losses, and diversify across multiple assets to reduce the impact of any single downturn.
- Monitoring and Rebalancing:
Monitor and evaluate your investments’ performance against your goals regularly. Stay vigilant to adjust your portfolio as market conditions or risk tolerance change. Also, keep rebalancing whenever needed to ensure your portfolio stays aligned with your objectives. For example, if your initial allocation was 60% stocks and 40% bonds, and stocks outperformed, consider rebalancing by selling some stocks and buying more bonds to maintain the desired balance.
Conclusion:
The purpose of an investment portfolio is to ensure your financial stability and independence. While you might focus on adding high-growth stocks or take an aggressive investing approach, it’s crucial to balance your risk factors. So, consult a registered share market advisory to build the right growth portfolio. A well-crafted portfolio isn’t just about maximizing returns; it’s also about managing risks effectively, especially in the unique landscape of the Indian market.
FAQs:
- What are the three types of investors as per asset allocation?
The three types of investors are-
- Aggressive investors (very risk-tolerant investors with long time horizon)
- Conservative investors (most minor risk-tolerant investors with short-term horizons)
- Moderate investors (one who can take some risk and keep a mid-term horizon)
- What is the income model of asset allocation?
The income model focuses on investing in bonds and dividend-paying stocks. It usually carries minimal risk and suits a short to midrange time horizon. Common investment splits are 100% bonds, 20% stocks and 80% bonds, or 30% stocks and 70% bonds.
