Library / MiyeeStockBuddy: The Complete Guide to Indian Markets

Part 19. Building a Portfolio, and a Plan To Learn

Individual ideas are the part everyone enjoys. The portfolio is the part that decides the result. This part covers how the pieces fit together and how to spend the next month actually learning this rather than reading about it.

19.1 Asset Allocation Comes First

Before choosing a single share, decide how your money is split between kinds of assets. Research consistently finds that this split explains far more of a long term result than the selection of individual holdings within it.

Asset	What it is for	What it does badly
Equity	Growing money over long periods, beating inflation	Can fall 40 percent and stay down for years
Debt: FDs, bonds, debt funds	Money you will need soon, and stability	Barely beats inflation after tax
Gold	Behaves differently from shares, useful in a crisis	Produces nothing; no dividend, no interest
Cash	Opportunity, and sleeping at night	Loses value quietly every year
Real estate	A large, slow, illiquid holding	Cannot be sold in parts or in a hurry

A common starting frame is to hold your age as a rough percentage in debt, with the rest in equity, adjusted for your own circumstances. It is not a rule and it is not sophisticated. It is a reasonable default that stops a thirty year old from holding everything in fixed deposits and a sixty year old from holding everything in mid caps.

The rule to remember

The correct allocation is the one you will still be holding after a forty percent fall. Any allocation you would abandon in a crisis is the wrong allocation for you, however good it looks in a spreadsheet.

19.2 The Emergency Fund, Which Comes Before Everything

Six months of expenses, in a savings account or a liquid fund, before a single rupee goes into shares. This is not conservative advice, it is structural.

Without it, the first time a medical bill or a job loss arrives, you sell shares. And because bad personal events correlate with bad economic conditions, you will be selling into a falling market at the worst possible moment. An emergency fund is not an investment. It is what allows the rest of your investments to be left alone.

19.3 How Many Holdings

Too few and one mistake dominates. Too many and you cannot follow any of them, and you have effectively bought an expensive index fund.

Number of holdings	What happens
1 to 3	One fraud or one bad sector ends the portfolio
8 to 15	Reasonable for someone who genuinely follows each business
25 to 40	You cannot follow them. Buy an index fund instead and save the effort
More than 40	A worse index fund with extra steps and extra tax

Concentration should also be limited by weight, not just by count. A holding that grows to forty percent of the portfolio has become the portfolio, and however well it has done, it is now the only thing that matters. Trimming a winner back to a sensible weight feels like a mistake and usually is not.

19.4 Where Derivatives Fit, If At All

For most individual investors the honest answer is: as a small, capped experiment, or not at all. Here is a structure that keeps them from doing damage.

1. Core, roughly 80 percent: index funds and businesses held for years. This is what actually builds the money.

2. Satellite, roughly 15 percent: individual positions with a thesis and a stop loss.

3. Derivatives, at most 5 percent: defined risk positions only, and a sum you could lose entirely this year without changing anything about your life.

Careful here

That five percent is a ceiling on total risk, not on any one trade. If you have five thousand rupees of premium at risk across four option positions, you are at your limit, whatever the margin screen says.

The reason the derivatives allocation is small is not timidity. It is that leverage makes ruin possible, and no expected return justifies a real chance of ruin, because the compounding stops permanently at zero.

19.5 Rebalancing

Once or twice a year, compare your actual allocation against your intended one and move money back. If equity has run up from sixty percent to seventy five, sell some and buy debt. If it has fallen to forty five, do the reverse.

This is mechanically uncomfortable, because it always means selling what has done well and buying what has done badly. It is also the only formal mechanism most people ever have for buying low and selling high, and it works precisely because it removes the judgement.

The tax cost, and how to reduce it

Rebalancing by selling creates a taxable gain. Where possible, rebalance with new money instead: direct fresh investment into whatever is underweight, and leave the existing holdings alone.

For a person still adding to their portfolio each month, this alone can do most of the rebalancing for years without a single sale.

19.6 A Thirty Day Plan To Actually Learn This

Reading this guide once will not make you competent. This is a month of specific, small tasks that will. None of them takes more than half an hour, and none of them involves risking money until the fourth week.

Week one: understand what you own

Day	Task
1	Open a demat account if you do not have one. Read the charges page in full, not the marketing page.
2	Pick three companies whose products you use daily. Find their market capitalisation and P/E.
3	For each of the three, find ROE, ROCE and debt to equity for the last five years.
4	Read the auditor’s report and the related party section of one annual report.
5	Check promoter holding and pledging for all three. Write down what you found.
6	Compare all three on one page. Decide which business you would want to own, ignoring price.
7	Rest. Do not open the app.

Week two: learn to read a chart

Day	Task
8	Look at one daily chart. Mark every place price stopped twice. Those are your levels.
9	Find three breakouts in the last year. Check the volume on each. Note which held.
10	Add ADX. Find a period below 20 and see what the other indicators were doing there.
11	Add ATR. Work out what a 2 x ATR stop would be, in rupees, for your three companies.
12	Find one bullish engulfing candle and one head and shoulders. Mark entry, stop and target.
13	Take one setup you found and size it properly using the 1 percent rule.
14	Rest.

Week three: options, on paper only

Day	Task
15	Open the Nifty option chain. Find the at the money strike. Note its premium.
16	For three strikes, split the premium into intrinsic value and time value by hand.
17	Write down the premium of one option. Check it at the same time tomorrow with the index near the same level. That difference is theta.
18	Find the strikes with the heaviest call and put open interest. Write down the implied range.
19	Check India VIX. Convert it into an expected daily move in Nifty points.
20	Paper trade one bull call spread. Write down max profit, max loss and break even before you start.
21	Rest.

Week four: small, real, and recorded

Day		Task
22		Write your rules on one page: risk per trade, maximum positions, what you will and will not trade.
23		Open a journal. Four columns: what, why, stop, exit plan.
24		Take one real position, sized at 1 percent risk, in a business you researched in week one.
25		Do nothing. Genuinely nothing. Write one line in the journal about how it felt.
26		Track the paper spread from day 20. Compare what happened against what you predicted.
27		Calculate what your trades cost in brokerage, taxes and spread. The real number, not the estimate.
28 to 30		Review the journal. Write half a page on what you would do differently. Then repeat the month.
The one instruction that matters most Do not skip week three by trading options with real money in week two. Every part of this guide can be learned slowly and cheaply except that one, where the tuition is charged in full and in advance.