Sizing one’s portfolio is quite important

Why is this necessary? If you have to increase your wealth you should know how to reduce risk.
Image used for representational purposes only.
Image used for representational purposes only.

When I see portfolios where people have made a lot of money in one share, I feel very good for them – they have made more money in a few years than people make in decades or even a life-time. When people make too much money in one share (or one piece of Real Estate) they start thinking it is their skill. They may have bought 50 shares in their lives, but when they make say 15x in 3 years, they don’t think about the other 49 shares in which they have invested!

Let me give you an example of a friend with a net-worth of about R100 lakh.

He invested a disproportionately large amount –Rs 20 lakh in one share at R30 in the year 2020. It was a fantastic investment indeed and the share is now worth Rs 450 per share. His net-worth is now about Rs 500 lakh!

He should (logically) book profits –this share is now disproportionately too much in his total net-worth. Selling such shares and putting it in a multi-asset fund (or 2 multi-asset funds) is one of the best ways to reduce risk. This is not a way to increase returns, but to reduce risk.

Why is this necessary? If you have to increase your wealth you should know how to reduce risk. Morgan Housel in his book says –

There are a million ways to get wealthy, and plenty of books on how to do so.

But there’s only one way to stay wealthy: some combination of frugality and paranoia. And that’s a topic we don’t discuss enough.

This ‘booking of profit’ is a must for all of us who have made an insane amount of money in a single transaction. Say a person with a Rs 10 crore portfolio has one share which is R6 crore, he should rebalance it as soon as possible.

Of course the share price could go up higher, but if you have say 20,000 shares, selling 2,000 shares is not a bad idea at all. At a later date, he may have to sell another 2k shares. If a person has debt (many people with debt do invest too!) then booking profits to pay off the loans (at least partially) is a great idea too. Morgan goes on to talk about Jesse Livermore –a very successful trader who was once a very rich man who never locked in his profits. He died a pauper even though he was once a millionaire!

When you see a lot of profits in one share and you don’t have any specific need for money, this rebalancing looks very cruel and restrictive. Actually it is a very good way to preserve wealth.

Say you bought 20,000 shares at Rs 30 and now it is at 450, the kick of seeing 20,000*450 is huge! Actually 18,000*450 also is not bad, but the pleasure is addicting.

Sizing one’s portfolio and reducing concentration risk are very important steps in wealth management.

Too much of profits from one share (or one fund or one house) looks nice, but the risk has to be reduced!

PV Subramanyam

writes at and has authored the best seller ‘Retire

Rich - Invest C40 a day’

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