Balancing act of portfolio restructuring and how much to hold in cash

 The current market conditions are testing the investors like they have been tested in the past. The newness lies not with the market but with the market participants. As of November 2024, approximately 36 million new demat accounts have been opened in India since the beginning of the year. This figure surpasses the 31 million accounts opened in all of 2023, indicating a significant increase in retail investor participation in the stock market

Are you worried?

Market corrections are normal, desperate sell-offs are normal as well. Stress in such conditions is normal too!

But if we understand why certain investors are stressed more and some less, it is related to how well an investor understands his or her portfolio. Someone who has bought equity stocks in an heard mentality and knows limited about that specific company finds a hard-time figuring out why the correction in the stock more than market correction (which in my view is normal too dependent on the nature of business and stock beta)

Recent months of bull-run, saw massive investments across small and midcap companies. I have a firm view that unless you know the promoters and you have read them through, you should not invest a substantial portion in those stocks. Better to invest in Midcap ETFs if you have to expose your portfolio to MIDCAP movements

What you bought was past, what you have in the present is the key?

Unlike what is quoted in a significant number of memes, even the stocks bought in heard mentality give returns but here the timing matters and averaging is essential. Since these stocks might be cyclical or run through certain period of good times. Thus, even if you have bought stocks in heard mentality, it is critical to ensure that you take right actions at the right time!

What do we mean by right actions at the right time?

If you are an active investor (meaning actively buy and sell shares instead of investing and forgetting type) then your aim to earn higher returns in comparatively smaller period of time. To generate this alpha, current market situations are key

1. Some of your existing portfolio stocks should be added more

2. Some of the sectoral stocks should be sold and instead sector ETF should be bought

3. Based on your time-frame some stocks should be totally exited as they might take longer than your time-horizon to give returns

4. If you are holding cash, relevant is how much cash is OK?

5. For the investors who would have entered the market in preceding 2-3 months only, you might be seeing negative returns, so are you comparing returns with FD? How much to move to FD?

Finally are you thinking to now become long-term investor?

In current bear-times, lot of medium term alpha investors try to ape long-term investors by not taking any action and hold on to their portfolio without and rejig!

The only area of contention is the inability to generate the returns which you were chasing and if you have pegged those returns to certain financial goals. My only point of view here is, despite of bear or bull run, you can generate alpha - while long-term investors use time as a lever, medium to short-term investors use portfolio rejig as a lever!