Avoid Leverage, Stay on Cash, Deploy Cash – What do they mean. Investment Portfolio.

Every now and then I keep mentioning about reduce leverage , stay on cash/Increase cash or deploy cash as the strategy decisions.


Let us look what it means.


1)  Avoid Leverage/Reduce Leverage.


What is Leverage ?

In simpler words suppose you have 5 lakhs in your account so you can only buy 5 lakhs worth of stocks.

Now if you would dabble in Derivatives you can buy almost four times your account balance. Also if you have a margin trading account you can buy quite a bit more. Also many brokers give you lot of margin.


The reason for mentioning reduce leverage is as quite a lot of derivatives traders cannot digest 20-40% cut in their portfolio ( we will take this in detail )


2) Stay on Cash/Increase cash


This implies one should take cash levels to 20-30% or higher depending on personal style. Also holding on to cash is difficult ( stay on cash ). Investors can also reduce part of their holdings either by partial loss booking or profit booking to increase cash.


3) Deploy Cash


This implies one would slowly buy stocks at dips or on regular intervals over a small period of time. Like the situation we are in now.



Apart from this there is rarely a time when i mention one can use leverage for high risk traders.


The problem begins with using leverage. First of all i would not recommend Derivatives to new traders and investors.

Rather i would actually recommend it to experienced and disciplined traders who can see sharp cuts in their capital and sharp appreciation as well in good times. 


Now let us look at an example on each.


1) Avoid Leverage. 


If one has a capital of 5 lakhs and derivative position of 20 lakhs. Even a 10% out of favor move on your position can hit you 40% ! If it goes 20% down you will be down 80% of the portfolio. At the same time if you go right you may jump up 40% also.


So the first question one needs to ask is --- Am i ready to see 20-40% cuts often in my portfolio ? If no simply forget Derivatives:) or allocate a small portion of your capital.


Actually speaking in markets even in the fall of 1992/2000/2008 a diversified portfolio could never go to zero. It is only leverage which can take away your capital.


2) Stay on Cash/Increase cash.


The biggest problem is to hold cash in markets and be patient for more lucrative opportunities. Like recently people got a left out feeling at 5400-5600 and could not hold on to cash and are now getting scared with dips. At the same time over 2011 many a times the strategy was to hold cash but people love to do bottom fishing and averaging.


Although one thing which surprises me is people are ready to book partial profit on any rise or at times shift from rising stocks to something else by reducing exposure. Now when the things go the other way i rarely see people selling partially to book losses and increase cash. Also if there is a wrong investment it is better to shift to quality stocks but nobody wants to do it. The worst part is people start averaging !!. The reason being we are not ready to accept mistakes or get an ownership bias.


3) Deploy Cash


This is the most simplest thing to do but one needs to be slow and regular. Also at times one should be ready to increase exposure in equities in the sharp corrections or in change of trend.

I believe in the current situation its a buy on dips and good time to start SIP too with an initial lump sum.


I hope the above boring posts helps clear some quickly used sentences.


Now lets put it to the current market scenario.


Very recently had mentioned to do partial booking on rise to 5400-5500. Now have been mentioning to slowly buy the dips which can be anywhere between 4950-5200. We will review the stance only when Index starts trading below 4950. Also on the upside would look to keep booking profits at 5300-5350 and 5450 levels as part of discipline.


Now people would ask me why should one not wait for either 4950 or 5050 or 5150 ( depending on ones view ) to buy in one shot. The reason being in corrections not all stocks will bottom out at the same time. So there are only two ways one buys stock specific slowly in dips or jumps in whenever the trend turns ( difficult for everyone ) like at 4600-4700 we suddenly decided to jump. Also accepted our mistake shorting at 5150-5200 πŸ˜› and turned around totally.


I continue to believe if one did not create a portfolio at lower levels the next few weeks could be a good time. Would you like to subscribe to an Conservative Model Portfolio which is purely for investors with a long term approach. If yes mail to analyseindia@analyseindia.com with your contact details to get the scheme details.


Above views are personal and debatable but just a way i look at strategizing and it may differ with every trader/investor. Again a boring post πŸ™‚ such posts come generally come when its a sluggish market πŸ™‚


Happy Investing,


Nooresh Merani


  1. smit
    March 27, 2012

    Hi Nooresh Sir,
    Nice Article Indeed ! Whats Ur View on Nifty For March Month Expiry on this 29th?

  2. Dinesh Varma
    March 28, 2012

    Dear Sir,

    Sir I read your articles on a daily basis and I really like the content it has. Thank you so much for sharing your analysis with all of us.

    Please advice on the below strategies:-
    1. If I am negative on stock, is it better to buy put option or directly short in future??
    2. I request you to please provide some hedging techniques for us to tackle the worst case scenario.

    Best Regards,
    Dinesh Varma

    1. nooresh
      March 28, 2012

      Hi Dinesh,

      If you are bearish go short on futures. If you expect the stock to fall in less then 5-10 sessions then options make sense.

      The best way to hedge is focus on increasing cash or going into defensives. Hedging through options is for derivative books.


Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.