The Silent Killer: Is Your Portfolio in More Trouble Than You Think?

Ajit Dayal, our founder, sent us an interesting chart the other day.

It highlighted how while the broader indices haven't corrected much, the median stock is down a lot more than the indices.

For e.g. while the mid cap and the small cap index is down 7% and 6% respectively from their tops, the median stock in these indices is down more than 20%. The story is similar for large caps and micro caps as well.

While I am not sure about the calculation and the number of stocks taken for analysis, I can certainly see this trend across a few of my recommendation services.

There, the median stock is certainly down a fair bit from its recent highs.

This begs the question whether one should be alarmed? Is this a cause for concern and whether the big market meltdown is finally here?

Well, to be honest, predicting what the market will do next is one of the hardest things to do out there.

Many an investor have lost a bundle trying to get this right. As the famous scientist Newton once observed, I can calculate the motion of stars but not the madness of people. I think Newton had nailed it. Stock markets move based on what investors think and their thought process can change on a dime.

In fact, all it needs is a handful of big investors to start panicking and the rest of the pack will follow, like those people who followed the pied piper to their fall.

Hence, if prediction is ruled out, preparation or protection remains our next best option. Predicting rains does not count, building arks does, goes the famous quote by Warren Buffett.

So, what is the ark that one should build? How do we ensure that it protects us against the fiercest stock market storms?

One of the simplest yet effective solutions is to always have at least 25% of one's corpus invested in bonds or fixed deposits and another 25% in stocks. This allocation should be sacrosanct. One should not deviate from this at any cost.

For the remaining 50%, one can decide whether one wants this to also be entirely in bonds and have 75% in bonds and only 25% in stocks or have the entire thing in stocks and be 75% in stocks and only 25% in bonds.

By the way, a 50:50 split is also a good option.

You can also decide the allocation based on the broader market valuation.

So, if the broader market is cheap and plenty of stocks are trading below their long-term valuations, you can have 75% in stocks

If the broader market is expensive and there aren't many value opportunities out there, you can be only 25% in stocks.

In the instances where you believe the broader market is neither cheap nor expensive, you can very well be 50:50.

Then all you have to do is check your allocation periodically like say every 12 months and make the necessary adjustments based on whether the market valuation has gone up or down.

This way, you will fortify your ark i.e. increase your stock allocation whenever there is chance of a big stock market storm. This usually happens when the stock market trades significantly higher than its long-term valuations.

However, a well-fortified ark is quite heavy and can affect your speed when the waters are less choppy i.e. when the markets are attractively valued.

Here, you may have to lighten up on your cash and put more into stocks to take advantage of the attractive valuations.

If you find this approach too simplistic, well, investing needs to be simple. There is no point in complicating it. This is not Olympics where you get extra points for building a complicated strategy.

All you need to do is survive a bear market and be fully ready to rake in the moolah when the next bull market lands up at your door.

This framework ensures that you achieve this objective with minimum fuss.

So, please do not worry yourself sick on what will happen to the market next and whether your portfolio will crash.

Prepare a plan like the one I highlighted and let it take care of the market volatility.

Happy Investing.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter
Equitymaster Research Private Limited (formerly Equitymaster Agora Research Private Limited) (Research Analyst)