Source: dailyrecord.co.uk
Super bikes are super popular with the youth today. Unfortunately, considering our crater-ridden roads, it would take a really skilled rider to get through them. They have to make sure that their bike does not fall apart bit by bit at a high speed.
Similarly, many youngsters today follow an aggressive investment strategy. They build a portfolio to get them on the highway to richness.
But there are several holes you should be aware of in such hyper-aggressive portfolios.
1) Investment Costs
Shekhar, 25 is a share market addict. He spends his breaks at office online trading and has an aggressive portfolio with too many transactions. Whenever he finds something that is (supposedly) about to move up, he buys it. After a few days, if it has not moved, then he sells it.
Sounds logical? Possibly.
But the one thing he misses out on is the cost associated with trading. It eats up a significant portion his returns.
For example, if he buys a stock and sells it after 5% gain in 7 days, then his real returns will be much lower than 5%. Transaction charges and brokerages will be deducted from this, which can be about 2-3.5% in the short term. This leaves his returns at just about 1.5% – 2%. And we haven’t even the considered taxes which will further bring down the returns.
2) Risk
A hyper aggressive portfolio will never have sufficient diversification. If the investor finds that it is a great time to invest in a particular sector, he pounces and puts in all his excess money.
He does not think that there is a higher risk when biased towards a particular sector.
For example, if the portfolio has a large exposure towards banking stocks, then any increase in interest rates by the Central Bank can bring down the entire portfolio.
3) Liquidity
Most hyper-aggressive portfolio will come with low volume stocks. The overall liquidity of such portfolios can be compromised if they have a larger than normal exposure to micro cap stock. Such stocks are highly illiquid and, hence, selling them at a moment’s notice in times of need is not possible.
Another problem linked with low volume stocks is that if one sells large quantities, it can lower the stock prices entirely, which, once again, becomes problematic for the investor.
4) Diversification
As already mentioned, a hyper-aggressive portfolio will generally not be sufficiently diversified. This means, that in all likelihood, a particular stock or a sector will have a big weightage in the portfolio.
This increases the risk due to concentration and dependence on a single stock or sector. Taking Shekhar’s example, in early 2000s when the dotcom buzz took place, he had invested a major chunk in it and then the technology stocks were literally slaughtered.
5) Tax Efficiency
A smartly designed investment portfolio takes proactive steps for cutting the threat of taxes. But hyper aggressive investors like Shekhar fail here too.
In India, capital gains arising from equities are not taxed if they are held for more than a year. Here, Shekhar’s portfolio was regularly churning to book profits from small up moves. Such profits, however small they are, are taxable as Short Term Capital Gains, which he neglected. And this further reduces the real rate of return.
Hence, it’s advisable to follow long term investing to make your investments tax efficient.
6) Performance
By design, a hyper aggressive portfolio will be very volatile. Due to this, it gives returns which will either be very high or very low. And this can be attributed partly to low diversification of the portfolio.
This is an issue, which someone investing in such a portfolio needs to have the appetite for. Generally, investments are for long term. So, if someone invests only for the next 2 or 3 years, then they are wrong. Long term is the right way to go about investments.
It is best to have a portfolio which is in line with your own personality and risk appetite. So, if you can handle the risks that come with the speed you can pick the hyper-aggressive way. We just hope you aren’t left picking up the pieces of your bike or your portfolio.
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