Winning and losing are two sides of the same coin in case of any game. Similar is the case of gaining and losing while dealing in markets.
This is because there is always an element of risk associated while investing in stock markets. While markets might turn enemy for us in the short term, it mostly bestows wealth upon us when we stick to our investments in the long run.
We, as investors, always get confused what to do with our investments which are moving southwards. This thought is so pressing that every now and then we keep checking our portfolio to see if there is any respite.
However, following this will not do any good. Therefore, in this article we will discuss what steps and mantras we can follow in times when our portfolio is at a loss.
First, you must answer two questions
In this article
- #Question 1 – Why is Your Portfolio at a Loss?
- #Question 2: What can You do to Rectify the Loss in Your Portfolio?
- Strategies to be Ahead of the Market (Crisis Control)!
#Question 1 – Why is Your Portfolio at a Loss?
The answer to this question is pretty easy. We can put the loss in two broadheads.
First, the portfolio might be bleeding because of the stocks or scrips that we have bought are bad. Meaning, these stocks do not have the potential enough to generate returns that will outperform that of the markets.
Secondly, the markets behave irrationally. This means there is an overall correction in the market or a major sector has underperformed leading to overall loss in the sentiment of investors, thus creating a contagion effect (This happened lately in the Indian stock markets recently in September 2018 post the IL&FS saga)
While the situation of removing underperforming stocks from our portfolio might be in our hands, we can’t do anything to change the scenario or behavior of the market to suit our investments when markets go berserk.
This means the second factor is beyond our control.
#Question 2: What can You do to Rectify the Loss in Your Portfolio?
In the first scenario, we needed to hunt the bad apples in your portfolio. But how will you identify them?
A simple way is to look at the returns that have been generated by these stocks and compare it with the market. If they fall short and have been underperforming for a long period as against the benchmark, it’s time to say goodbye to that stock.
The other way is to check various ratios which help us gauge the performance of the company as well as see if the stock is overvalued.
Example of key metrics to look at may be operating margin, quality of earnings, net profit margin, cash conversion cycle, return on equity etc.
To check whether the company is overvalued or not, we may check the metrics such as price to earnings, enterprise value to EBITDA etc.)
Investors should pay special attention to the performance over long periods and not limit to comparison of a particular stock against the benchmark for only a short period of time.
Let us take an example to understand this.
Maruti Suzuki can be taken as an example which has given tremendous returns to investors in the long term. It has more than doubled investor’s money in a matter of three years.
However, due to several headwinds which have come in the way of the automobile sector, there has been a serious rub off in the stock price.
These headwinds include:
- Increase in the cost of inputs
- Increase in third-party insurance cost
- Ballooning of oil prices in the major part of fiscal – 2019
Because of a variety of reasons, the entire automobile index has faced the brunt.
Maruti Suzuki being the leader has corrected more than 30% this year owing to these reasons. This might induce a naïve investor to jump the gun and sell this stock at a loss.
But given the strong fundamentals and policies set by the government, the future seems quite appealing. This is where we need to differentiate .
Question 3: What Do You if Your Portfolio is Suffering a Loss Due to Market Correction?
The answer to this question is very clear. We cannot control the market behavior.
Stocks, in the long run, are a summation of various factors such as the economic growth of the country (GDP), fundamentals of the company and government policies driving the growth of the sector.
However, in the short run, the markets are driven by the sentiment of investors. These sentiments are not something we can predict.
Therefore, the best scenario for us is to not show much enthusiasm but to watch out for stocks which have corrected and grab them at attractive valuations.
Market correction is the best time to invest for long term investors and those stocks which are robust.
We can give you several examples to highlight a scenario as such. The latest of the crisis was the IL&FS crisis. Various NBFCs (especially HFCs) lost a huge chunk of their value as the crisis played out.
However, we should understand that this does not mean that every stock in the NBFC space is bad.
It is then your task to hunt for quality picks which can withstand this major panic. An example of the same could be HDFC Ltd.
HDFC Ltd corrected for a short while, but is now delivering solid results.
Strategies to be Ahead of the Market (Crisis Control)!
1. Don’t Press the Panic Button i.e. SELL.
As Warren Buffet explains, the stock market is a place where money is transferred from restless to patient investors. It is under these circumstances that we need to stay put with our investments.
The Nifty 50 had corrected more than 50 percent in the global financial crisis. Many investors buckled under pressure and sold their investments.
But if we had stuck to our investments, today we would have been sitting on a gain of approximately 200 percent (roughly CAGR of 13 percent);
2.Diversify Your Investments through SIPs and STPs
SIPs and STPs invest an ascertained amount in a particular scheme and it is based on the concept of rupee-cost averaging. During market correction, we are allocated a greater number of units and hence, they can capture profit when the markets stabilizes;
There are points in the market whereby many stocks fall below their intrinsic value. If we want to make lump sum investments, this is the ripe time.
We can be as ecstatic during these times as we get excited seeing discounts on our favourite brand of clothes and accessories because stocks too are trading at a discount at this point in time;
3. Stocks Bloom in the Long Run!
This was discussed earlier as stocks track the growth of the country (GDP) and other macro-economic parameters. Therefore, investors should learn the principle of sticking to good stocks, as in the long run, these will exhibit good results.
At times wherein our portfolio is not performing well, we should answer three simple questions to get the matter resolved.
This solution includes a slight tweak in your investments but hunting a good picks is really instrumental for good performance.
Also, it is important to stick to quality picks during volatile times, only to reap the benefit later.
Disclaimer: The views expressed in this post are that of the author and not those of Groww