How to Optimize the Portfolio?

 

Let us consider the earlier example of the Optimized Portfolio (PU001-04252021) where we have considered 30 US stocks clubbed in “Dow Jones Industrial Average” (https://optimizeportfolio.blogspot.com/2021/04/dow-optimized-portfolio-pu001-04252021.html).

 

We have highlighted and indicated the top 5 (in Green) that constitute the Optimized Portfolio with a specified weightage. Now what about the remaining 25 that were not mentioned is the question?

 

MMM	CAT	GS	JNJ	NKE	VZ
AXP	CVX	HD	JPM	PG	V
AMGN	CSCO	HON	MCD	CRM	WBA
AAPL	KO	IBM	MRK	TRV	WMT
BA	DOW	INTC	MSFT	UNH	DIS

Table showing all the 30 stocks of DOW Jones Industrial Average.

 

Let us consider we have 2 categories of Investors:

• New Investor, Who starts his investment based on the suggestion provided in Optimized Portfolio (PU001-04252021).
• Gradually increase your stake Month on Month with the weightage shared for AAPL, HD, NKE, UNH & V stocks.
• Also continue to keep a watch on the Monthly Review of the Portfolio - PU001-04252021.
• Existing Investor, who has holding of certain stocks and now wants to go ahead and Optimize his holding.

 

Let us now investigate an existing Portfolio of an Investor that consists of the following stocks of value / worth 20K USD, what should he do?

 

#	Stock	Ticker	Market Value Today	# of Shares Held	Value in $	% of Capitol
1	American Express	AXP	153.35	90	13801.50	69.01%
2	JP Morgan & Chase Co	JPM	153.81	10	1538.10	7.69%
3	Travelers Companies Inc	TRV	154.66	15	2319.90	11.60%
4	Intel Corporation	INTC	57.53	29	1668.37	8.34%
5	Honeywell International Inc.	HON	223.04	3	669.12	3.35%
Total Value of the Portfolio					19996.99	99.98%

 

• Continue to hold the stocks as long as you have made profit on those stocks and they are in an uptrend.
• Also get the underperforming stocks moved out of the portfolio that are giving loss.
• Ensure to see that no single stock has higher weightage as compared to others, this is because, if there is a loss on this stock, it would be a huge loss for the overall portfolio.
• Now in the above example, as we have 69% highest holding on American Express (AXP), book the profit on this stock and reduce its holding by 50 % and add the stocks suggested in the Optimized Portfolio - PU001-04252021.
• The updated Portfolio of the existing investor would be like this.
• With this we can see the following Advantages:
• We have booked Profit on our most loved Stock (as this is the only stock which has the highest stake / investment)
• The Portfolio now has become more diversified for 5 to 10 stocks with lesser chance of losing from loss due to the fall of a single stock.

 

#	Stock	Ticker	Market Value Today (2nd May)	# of Shares Held	Value in $	% of Capitol
1	American Express	AXP	153.35	45	6900.75	34.50%
2	JP Morgan & Chase Co	JPM	153.81	10	1538.10	7.69%
3	Travelers Companies Inc	TRV	154.66	15	2319.90	11.60%
4	Intel Corporation	INTC	57.53	29	1668.37	8.34%
5	Honeywell International Inc.	HON	223.04	3	669.12	3.35%
6	Apple	APPL	131.46	15	1932.00	9.66%
7	Home Depot	HD	323.67	8	2587.50	12.94%
8	Nike	NKE	132.62	2	241.50	1.21%
9	United Health	UNH	398.80	5	1814.70	9.07%
10	Visa	V	233.56	1	324.30	1.62%
Total Value of the Portfolio					19996.24	99.98%

 

Please note that this and the other articles published in this blog are as part of Knowledge sharing as indicated earlier and should not be construed as indications to proceed with actual investment. For actual investment please consult your financial advisor or make further investigation before you take a decision.

 

Stay tuned, following are the items that will get published in next 2 to 3 weeks.

• What is Re-Balancing the Portfolio and what should be its frequency? (Will consider the above example for Re-Balancing)
• The first Optimized Portfolio from Indian Stocks.
• 1^st Monthly Review of the DOW Optimized Portfolio - PU001-04252021.

Earlier Article in the same blog: https://optimizeportfolio.blogspot.com/2021/04/portfolio-optimization-portfolio.html