2021, The Equity Year That Was!

A review of my year in equity

2021 is at an end. This is the first full year of blogging on this topic. So, in keeping with tradition, it is time to do an end-year analysis.

I am not doing a portfolio analysis to say how well I did compared to the market. Suffice to say, I did reasonably well.
My analysis was to understand whether I am implementing my investment thesis or not.

This is in two parts, my overall asset allocation, and my equity portfolio.

Overall asset allocation:

I have been monitoring this more closely throughout the year. It is much harder to make big changes in the overall asset allocation. Like a lot of people in my strata, we are invested in real estate.
I was late to the entire personal finance thing. My serious involvement with equity has also been recent.

My current ideal (planned) asset allocation across asset classes is:

• Equity: 60%
• Real Estate: 20%
• Debt: 15% ( I include PPF & EPF in this)
• Gold: 5%

As you can see this is a more aggressive asset allocation. Until recently I was thinking of Equity at 50%. But the significant difference in returns has made me relook at the allocation.

As of writing this, Dec ’21, I am still skewed towards real estate.

At my present investment pace, it will take me ~3 years to get to my ideal allocation.

I am not looking to move money from one asset class to another as that usually means an unnecessary tax hit.

If you are starting out in this space, I would recommend you write down an asset allocation plan. It is much easier to implement once you are clear on what the plan is. It is much harder to change asset allocation once invested.

In conclusion for the review, my actions at a high level were in line with plan – I had planned to focus on equity investment and have done so.

Let us now get on to the Equity part of this post.

First, what is my thesis?

I started as a ‘mostly passive’ investor for equities.

What does ‘mostly passive’ mean ?

It means I will not spend too much time or effort analyzing individual stocks.

I don’t spend too much time on specific investment bets but on the basket as a whole.

What that should translate into is – I will invest in the Index more often than not.

If I invest in stocks, it will be based on firm conviction built up over time.

The ‘mostly passive’ is how I started out in 2020. But over time I have developed a little more interest. My reading and observations of other investors have driven this change.

My updated thesis, through 2021 is the following:

1. Invest in Passive Index Funds (I call these low risk)
   1. Nifty 50
   2. Nifty Next 50
   3. Nasdaq 100
   4. Bank Nifty (this is thematic, I know)
2. Invest in large cap stocks that I will hold for 10 years ( medium risk)
3. Invest in small caps, potential multi-baggers – also hold for 10 year time frame (high risk)
4. Invest in a higher risk/return strategy such as ‘Momentum’ (high risk)

Lately, I have also started nibbling at Cryptocurrencies.

So, my ideal equity portfolio is

50% Low Risk – Index,

25% Medium Risk,

25% High Risk.

This is just the starting position of my thinking on this topic. It will evolve over time.
So, the above was my thesis.

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My actions in 2021

Now, to see how I actually implemented it.

During my December portfolio review, I discovered that I was far from ideal.

• I had been buying stocks through the year. In retrospect these were not businesses I had built high conviction on.
• These individual stock investments were taking away from my index investment kitty
• Implementing the momentum strategy was taking a lot of time and mindshare. It also led to some frustration at not being able to enter and exit stocks at the recommended prices.
• I was concentrated on large caps, some of which were lagging the index.
• I did not have enough invested in my multi-bagger bets

This was a bit of a revelation to me. I had not realized that my actual implementation had moved so far away from ‘mostly passive’.

My actual % allocation:

• High: 16%
• Medium: 68%
• Low: 16%

I have since repaired the portfolio and will bring it more in line with plan over time.

I have exited all but very few large caps where I have a lot of conviction.

Momentum: I am convinced that Momentum is a strategy that works. There is enough written material on this topic. We can discuss this in another post. Implementing the strategy, however, need not be complex.

For the Momentum strategy, I have decided to go through a PMS. This will take away my time involvement and reduce frustration. A cost of 1% which I will incur is a good trade-off.

All investments over the near term will remain in index as I bring my equity allocations closer to ideal.

I am planning on allocating 2% to Cryptos in my portfolio. I consider Crypto as part of my equity investment basket.

That was my review of how I have done through 2021 in terms of my equity.

It resulted in my taking a few clear actions, selling stocks, buying more index and getting out of active management of my momentum strategy.

This was a longish, slightly rambling post. It definitely helped me to review my portfolio at the end of the year. It shed light on some of the things I had not realized I was doing.

Doing an annual review of your portfolio and updating your thinking in this space is a must-do. Doing this review also taught me how I was going off-track. I am glad that I did this review.

This would also be a good time to read up the very basics and the ten fundamentals.

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Key Takeaways:

• Doing a periodic review of the portfolio is very important
• helps you identify how you are doing against your planned investment thesis
• having a written down asset allocation plan is important for long term implementation
• Create an ideal equity portfolio to compare against your actual investments

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