Wednesday, November 4, 2015

Portfolio Retrospection

As a long term investor, it is important to revisit and perform a portfolio retrospection from time to time. Normally investors tend to do this at the end of the year, but as long as you do it regularly (without overmonitoring/obsessing over it), its all good. Our needs, risk/reward profile etc change constantly as we mature and gain more experience as investors. What was once believed and held true can change in a matter of days or weeks. When the markets are going up and everyone is making money, it is easy to lose track and keep emotions in check. Or worse, apathy creeps in. But during market crashes, corrections and bear markets we realize that we should’ve been more careful and regret with some of our decisions.

Portfolio Retrospection

August saw some increased volatility in the stock market and the S&P 500 index dropped 10%. While this kind of correction from time to time is healthy for the overall market, it is important to be self-aware and reflect on the emotions/experiences. Year-to-date, the market is still trading pretty flat with the S&P 500 down just 2%.
Screen Shot 2015-10-10 at 1.29.03 PM
But think back to the the time when the market dropped 10% in late August. Did you panic and sell? Did you hold out hoping that the market would bounce back just a little bit and once it did, you would sell your position and take profit quickly? Did you at any point in time wish you didn’t have a particular company in your portfolio?

If you answered yes to any of the questions above, you need some serious reconsiderations. As Warren Buffett said:
“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
There is a lot of wisdom in those words. You should not be invested in a company if you are not confident enough to own it for years or decades to come. A 10% drop in the stock market is normal and if you found yourself panicking or wanting to sell out…you should simply just sell it and exit the position. Now! In fact, now would be a great time as the market has bounced back and recovered after the August drop, but remember that we are still hovering near all-time highs. Remember, we have had 6 years of bull market and major corrections or reversals are only a matter of time.
Screen Shot 2015-10-10 at 1.50.30 PM

Diversify, Diversify, Diversify!

When it comes to investing and protecting your assets, diversification is one of the best tools available. Diversification allows investors to mitigate risks and protect assets when there is a downturn. Diversification can come in various shapes, forms and sizes. I have written about the Importance of Diversification in the past and invite you to read the articles. In Part 1, I discuss the importance of diversification in investing, where I highlight that studies have shown that diversifying in as little as 12 companies can reduce the Unique Risk in your portfolio. Note that Systemic Risks exist no matter what. In Part 2, I discuss diversifying income sources – and highlight how extreme events such as job losses can be cushioned via diversification. Another form of diversification that I like when it comes to investing is revenue diversification – to track the fact that the companies I own do not rely solely on one country or geographical region for generating its profits.

Remember, the time to diversify is not when the market crashes and there’s panic abound. Investors should always keep an eye on diversification on a regular basis. If you are not diversified enough during a market crash, its too late. During a crash, investors should be buying more high quality assets at decent/discounted valuations.

What are your thoughts? Do you own any asset in your portfolio at the moment that you would not own if the market dropped by 50%? Share your thoughts below.


Post a Comment

Recent Posts From DIV-Net Members