hi
i started investing since late 2014. my portfolio was small then and even though i had bought good stocks which eventually outperformed all the indices the drawdown from 9100 to 6800 was very painful. i went from +15 to -15 . the only reason i didn’t panic was because of the small size of my portfolio. i invest mostly in small and mid caps. the indexs have gone up by 50% ytd. i know they will be volatile during a market correction which i believe is coming soon. during last year when my pf grew to a decent size i started hedging via nifty when ever i felt the market was overheated. even though i made money being short nifty during the small corrections it is obviously not enough.
i am 20% in cash right now and dont want to sell my existing stocks. any ideas on how to hedge a pf of around 20 lakhs? i dont think the midcap and smallcap index futures are liquid enough to sell.
Hedging works only when there is an instrument like NIFTY that is a) liquid enough to trade and b) mirrors the portfolio in a meaningful way. In my opinion, even BANKNIFTY is not a great hedging instrument for banking stocks because of its over weightage on handful of stocks.
Unfortunately there is no clear hedging instrument for small caps & even mid caps. To make matters worse, the correction in these stocks tend to be much more brutal (sometimes 30-50%) than their large cap counterparts.
I suggest you look at this category of stocks differently. Why fall in love with them and keep holding on their way down? Why not keep a trailing stop loss on the individual stocks and exit when the trail is hit. You can always reenter the same stocks at much more attractive prices when the correction is over. Trailing can be done by indicators such as breaking of key support levels, Exp. Moving Average and my favorite Renko charts.
I am sure the seasoned investors on the forum can give more creative solutions but I thought of giving my perspective.
i have a diversified pf. it tracks closely to mid and smallcap indexs(nifty sml100free, nifty mid100free)
top stocks are ptc,dhfl,dbl,ktk bank,sudarshan chem. i think these will compound at a good rate.
To hedge your portfolio , whether it is a small or big in size , really there is no right option , even if you buy PUTs for protection, that comes at a cost , and in my experience, that does not work. Instead of keeping cash one can buy LIQUID BEES , One thing you can do during correction is that , just keep 100 day SMA as a stop for your stocks on weekly chart for medium term & 100 SMA on Monthly chart for longer term. some of the stocks are always in a range for a longer period of time , so its better to take profits in between and always there is a chance to re enter it again . In case of KTK Bank is in a range of 70 to 175 level from last 9 years , so if you take 100 SMA as stop in case of KTK it comes in the middle of its range ( 125 ) on monthly chart , so i feel this way one can hedge their portfolio . being my opinion , there will be , some more insight from experienced investors on Q&A
Only way to hedge long term portfolio is to follow warren-buffet ‘s rule to get rich i.e. being fearful when others are greedy. So u need to book profits if u feel others are getting too greedy and ur stocks are way above their fair valuation.
Now the question is how much profit u want to book and by booking profit now how much upside ur willing to forgo. Not a easy choice. One of the rothchilds family member said “I m rich because i enter late and exit early”. Exiting early is vital in case of small and mid cap stocks.