Apart from this, leap years too have seen a lot of volatility. Statistics show that Indian markets face drawdowns of about 25% every 3.5 to 4 years. 2024 is a leap year and this pattern too adds up to the overall market volatility.
Current Euphoria in the markets is evident through the rapid and exponential surge in the share prices of several penny stocks.
Often these companies either lack transparency, a sustainable business model, or management integrity. These factors are overshadowed in a bull run and every company seems to have good prospects where everyone recommending such penny stock has a convincing story.
As a result, an investor ends up adding many such volatile and risky stocks to his/her portfolio without thinking about the position sizing, liquidity, and its influence on the entire portfolio.
An investor having a reasonable number of stocks with a proper position sizing would generate better results than the broader indices. Still many end up adding several penny stocks to their portfolio in such quantities which in no way influences the magnitude of returns but it increases their risk.
Here’s an example to drive this point. Below is an example of how impactful large concentrated bets can be. If a position with 20% allocation of your portfolio moves by 50% then it will add 10% to your portfolio. If a position with a 10% allocation of your portfolio moves by 50% then it will add 5% to your portfolio and so on.
AgenciesOn the other hand, if a stock holding 2% in your portfolio moves by 100% then it will add 2% to your portfolio and if a position with a 1% allocation moves by 100% then it will add only 1% to the overall portfolio.
AgenciesThese days investors have been buying penny stocks in the hope of doubling their money quickly but they are missing out on this important point. Instead of increasing their returns, they are unintentionally taking more risks.
A renowned Professor from Princeton University Burton Markiel states that by the time the portfolio contains 20 equal-sized and well-diversified stocks, the total risk of the portfolio is reduced by 70% and any further addition of stocks doesn’t contribute much to the risk reduction.
AgenciesIt is visible that neither return is exponential (from the table) nor does it mitigate risk (from the chart) after a certain number of stocks.
Therefore, over-diversification through the addition of penny stocks with a lower proportion of holdings dilutes the impact of successful stocks. A portfolio stretched too thin diminishes the influence of winners resulting in less significant gains at the overall portfolio level.
Technical Outlook:
Nifty hit a fresh all-time high of 21,928 on 12th January, 2024. The Index had been consolidating in the 21,500-21,800-range since 28th December 2023. Nifty ended the week, gaining 184 points and closed at 21,895.
Despite the price making higher highs on the daily chart, the Relative Strength Index (RSI) has been moving in a lower high formation, resulting in a bearish divergence. Nifty has formed a hanging man candle on the weekly chart, which is usually considered as a sign of weakness. The put writers (bulls), however, dethroned the call writers (bears) from the maximum call open interest strike of 21,800, which acted as a strong resistance for Nifty. The resistance shifts to 22,500 level after Friday’s closing session.
The Foreign Portfolio Investors (FPIs) Long-Short ratio has been hovering between 60-70% since the start of January Series expiry. It will be interesting to see if Nifty can sustain above the 21,900 levels. A follow-up buying from the current level can push the Nifty beyond 22,000 levels. The level of 21,800, which acted as a resistance earlier, is expected to act as a support for Nifty.
