With all the fear in the markets as of late, how has your portfolio fared in relation to the overall market? And should you be concerned?
Recently I’ve asked this question myself for my own portfolio, especially the longer term holdings which has seen its’ fair share of market volatility.
Although it is never a good feeling to see your portfolio drop in value, even if it is line with negative market performance and not any worse, the following are three questions and action steps which you as an investor or trader can use right away to overcome challenging markets.
This way, continued market volatility won’t give you sleepless nights or stomach ulcers!
Firstly, do you have a long term investment portfolio, a trading portfolio or both?
If you have not yet segregated your portfolio into either a long term investment portfolio or a shorter term trading portfolio, you must do this at once.
Personally I have both long term investments as well as shorter term trades.
For long term investments, generally market volatility on the downside means an opportunity to either buy more of my current holdings at lower prices or to add new undervalued stocks which I’ve been waiting for to ‘go on sale’.
For shorter term trades, I make sure tighter risk management parameters like stop losses are in place at all times, and hopefully most of the trading portfolio is now back in cash to avoid being whipsawed around.
So the first step is to make sure you never confuse your long term investments and goals with your shorter term trades because you can easily panic in times of fear and then potentially pre-maturely sell out great companies at depressed prices which ultimately leads to lower long term returns.
Secondly, always ask yourself if you would still buy the current stocks you hold in your long term portfolio if you get another chance?
I call this zero based thinking, which I remember learning years ago from a gentleman by the name of Brian Tracey.
By asking yourself this question, it then allows you to answer this simple question;
Do I buy more of what I have or do I sell what I have?
Interestingly this question also illuminates your emotional baggage you have of the feeling of loss, because now you feel the excitement of finally taking action and being able to get rid of underperforming stocks which have been sitting in your portfolio for far too long, and freeing up capital to invest into something else better going forward.
And finally, are there any sectors or industries which have clearly been oversold in this panic to take advantage of?
The market is a forward looking machine and despite what academics say about market efficiency, the market will always be a voting machine in the short term and a weighing machine in the long term, a very valuable lesson I learned from Warren Buffet’s mentor, Benjamin Graham.
This is where real money is made. By buying the strongest companies which will not only survive but prosper during hard times since most of their competition will either fall away or be taken over, further consolidating the industry and allowing the strongest operators to flourish in the near future.
The energy sector is an obvious choice, but the banking industry is another which has been severely punished just because of the incorrect assumption of potential ballooning bad debt which could bring about another financial crisis.
You only have to look at the dramatic increased capital reserves the major banks now hold over the past five years due to new banking regulations that have been put in place since the GFC.
Also their exposure to the energy and commodities sector is quite small relative to their overall lending portfolio, which simply means they will not be in major trouble any time soon.
By observing where the ‘smart money’ is currently going into, you will see they are clearly taking advantage of cheap valuations on selective energy plays and the banking sector. They are contrarian and it is times like this which they build their long term performance and reputations on.
These three simple action steps should help you navigate through any current or future market panic with more confidence and courage to go out there and look for opportunities rather than shrinking with the rest of the crowd.
It has for me.