Wednesday, July 8, 2015

Time To Revisit Risk In Your Portfolio(While the Birds come home to Roost in China)

The 30% spiral in mainland Chinese market in the last One month could be a harbinger.This blog has consisted talked about a bubble in China for at least the last six months.Add the situation in Greece,Puerto Rico into the mix and we have the stage set for super volatility.

Harry Markowitz and his book,"Portfolio Selection"gave us a Nobel Prize level option on how to use risk to select a portfolio where the sum of the stocks held had lower risk(standard deviation) than individual stocks in the portfolio.

This is the time to revisit Risk in your portfolio.The mathematics of Modern Portfolio Theory(MPT)are too complex to describe and keep many academics busy their whole career.Suffice to say that 'higher risk leads to higher return'.How much pain are you ready to bear for the returns that you expect from the market.And yes i am talking about MPT and not S&M...!!

If you are risk averse.SIT OUT.

If you are a long term investor(3+ years).You are not exactly in heaven,but just a little way away.

If you are a trader.Do Yoga.Cause you will have difficulty in understanding which way is up and which is down!

This is a market where both the Bulls as well as the Bears are overconfident.Its tempting to short at higher levels and afraid to go long at lower.

Best would be to build a diversified portfolio although India looks insulated from Greece and China at the moment.Brent crude at $56 is lower than the new $120 i.e. $60.Base metals fall also means a lower inflationary trend for Indian economy.

Negatives will be the lower corporate earnings for previous quarter,all the sundry scams that have descended on the Government this past month,no clarity if GST will be passed this monsoon session,the Monsoon after being 23% over in June has lagged slightly in July.

Nifty after building a strong base at 8000 seems to be going into the 8200 - 8500 range.Wait for Europe to stabilize.China and Hongkong other than sentiment will not impact materially.

But paraphrasing a Biblical warning,"He who looks back at the prediction of Market Gurus will die of remorse".