Empowering every investor: How factor analysis can supercharge your portfolio
Six hours and fifteen minutes of trading every day—an infinitesimal time and yet it holds the power to be a cradle for dreams. The trading floor, every single day, witnesses celebrations, heartbreak, hope, and prayers—everything at once—for it is the quintessential ladder to scale fortunes.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} With an eternal hope to make a fortune, millions in India have taken to trading, with a recent unprecedented surge. Demat accounts in the country have swelled from a meagre 36 million in 2020 to 160 million this year, 4.3 million of them in June alone.
Apart from seeking substantial returns, of course, what does every single one of these traders crave? Some semblance of stability and a little impunity from the factors that drive the markets haywire every now and then, right?
Where does stability and impunity come from? The world over investors repose their trust in “factor analysis”, which we have already explained in great detail in the first two episodes of the explainer video series, titled ‘Beyond Charts and Fundamentals: Decoding Factor Analysis’.
So we have taken the guesswork in picking stocks out of the equation with the insights that factor analysis empowers us with.
Now is the time to put forth an actionable strategy and utilise the theory of factor analysis to some practical use, or more precisely “building an investment portfolio using factor analysis”.
Factor analysis helps us with stock selection, but the truth is that picking individual stocks comes with high risks. What builds sustainable wealth then? Building a portfolio does, which takes care of diversification!
Watch the third episode here:
Building an Investment Portfolio Using Factors
Unlock smart investing todayYour search to find the most suitable stocks ends here. Vaibhav Jain breaks down how to build a smarter portfolio using factors like momentum, value, and quality. Learn how Share.Market’s expertly curated products make it easy to access these proveninvestment strategies.Start your journey to financial success today!Building a solid investment portfolioA portfolio is a group of stocks we pick, across sectors and market cap categories, that complement each other in certain ways and ensure that we as investors get sustained returns on our investment. Portfolio building is a superset of stock picking.
For ease of understanding, we have pulled together two sets of imaginary ten-stock portfolios, with real stocks. Have a look at the first one.
ET SpecialThis portfolio looks nice, doesn't it? A well-diversified portfolio made up of stocks picked across sectors and market cap categories. The stocks are top-notch and well-known among investors. So we will expect the portfolio to give us returns, which it must. However, contrary to popular perception, this approach may not be ideal, as it could carry hidden risks or veiled threats that we often overlook.
Have a closer look at the table again. All the stocks we have picked have a high quality score, but they fall short on other factors, including the momentum factor, the value factor, and the volatility factor.
Now what if the quality factor starts underperforming? And we have seen that happen during the pandemic, it is not a hypothetical situation. The quality stocks start underperforming and the quality factor falls out of favour, just like that.
What happens to our portfolio in such a scenario? It tanks, doesn’t it? And that is too big a risk to carry for any investor. Every factor is significant, and unless we do not take all of them into consideration, we are not building a resilient portfolio.
A portfolio can be expansive with a great number of stocks, picked from across sectors, but ignoring the risk factor exposure will eventually lead to undesired results and/or losses.
How do we mitigate the risk? And the best part is, that is no rocket science—it is simply putting your knowledge of factor analysis to good use.
Have a look at this second portfolio!
ET SpecialAt first glance, this second portfolio will look quite similar to the first one, given the fact that this too has a great mix of mid, small, and large stocks from across the sectors. What sets this apart then? It is the fact that all the stocks have an above-average score across factors. The momentum factor is great, the value factor is good, and the volatility factor is bankable as well.
This portfolio assures us that it will weather the storm on any given day. If one factor starts falling out of favour, other factors will come into play and save us from substantial losses, giving us the semblance of some stability the investor craves.
Not only the stability, the portfolio is going to deliver the desired returns to us regardless of the market conditions.
This is a robust mechanism that has been put in place after years of research and data analysis. The best investment managers world over employ this strategy to minimise losses and attain consistency for their clients. Billions are invested every single day betting on these strategies.
In India, Share.Market is the first and only discount broker to have democratised this technology and made it accessible to the masses at a retail level.
Start your journey of factor investing today.
To learn more, visit the website.
Disclaimer:
This article is part of a series of three explainer videos by Vaibhav Jain, Head - Content and Education at Share.Market. All views expressed in this article are those of the author. #sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} In Video: Building an Investment Portfolio Using Factors
This story originally appeared on: India Times - Author:Faqs of Insurances
