Whats your portfolio strategy?

Iconic investor Warren Buffet once said, “We don’t have to be smarter than the rest. We have to be more disciplined than the rest”. Building the right mutual fund portfolio calls for a disciplined approach and proper planning. Constructing a ‘right portfolio’ may sound simple but selecting a strategy to build a right or constructive portfolio that suits you is quite complex.

Hence, it is crucial on your part to identify and implement a portfolio strategy that best suits your circumstances and needs. While it is important to know the objective of your investment before deciding on your portfolio strategy, knowing your risk appetite is also equally important.

Permanent Portfolio Strategy

This portfolio strategy was devised by a free-market investment analyst, Harry Browne, in 1980s. This was designed to perform well in all economic conditions. Browne stated that equal allocation between growth stocks, precious metals, government bonds and treasury bills (cash) would be an ideal investment mix for those investors seeking safety and growth. This means that growth stocks would prosper in expansionary markets, precious metals in inflationary markets, government bonds in a recessionary phase and treasury bills or cash in depression.

Such a portfolio strategy doesn’t generate better returns than other portfolio strategies as growth stocks account only for 25 per cent of the entire portfolio. However, in case of downfall in the equity market, this portfolio is the one that would contain your losses because only one-fourth of the asset is invested in the equity.

Classic Balanced Strategy

This is one of the oldest portfolio strategies, according to which, it is better to invest in equity and debt in equal proportions. This strategy follows the principle of growing when the market booms and sliding less when the market crashes. If we had adopted this strategy during the period of 2000 to 2019, the CAGR generated by this strategy would be 11.42 per cent and its standard deviation for the period would be 0.14. If we compare this strategy with the permanent portfolio strategy, it becomes obvious that the permanent portfolio strategy proves to be a better option in terms of downside risk. However, to get a reasonable balance of risk and returns, the classic balanced portfolio strategy is much better.

Dynamic Portfolio Strategy

This portfolio strategy is dynamic in nature. It depends on equity market valuations. If the equity market valuations are high, they shift your investments to more conservative asset class and vice versa. This strategy helps to dynamically manage the risk of the portfolio and maximise returns. Let us assume that the market (Nifty) is valued based on its price to equity (PE) ratio. Thus, when PE moves higher as compared to its long-term median, part of the equity investments is shifted to debt and vice versa. For the period between 2000 and 2019, the implementation of this strategy would have generated annualised return of 13.65 per cent. In terms of risk, standard deviation and downside deviation stood at 0.15 and 0.03, respectively.

This strategy attracts more risk but greater returns. In this case, building and managing your portfolio has a limitation because it cannot be assigned to any goal. This strategy is therefore well-suited for people seeking wealth management. It is to be noted that the allocation between equity and debt is based on PE of the respective year with respect to a 20-year median PE.