Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 349

Shaken by stock market carnage? Forget everything

All I am reading and hearing all around is this. Volatility is your friend. Stick to the long term. Don’t touch your portfolio. Keep some cash. Invest that in a staggered manner. Recheck your asset allocation. Shuffle your stock portfolio. Don’t borrow to invest. Don’t speculate. Quickly search for new stock ideas. Stop watching news.

Well, let’s cut it all.

The markets are sneezing bad, and your portfolio may be in a sea of red on account of the big recent declines.

Amidst this, what can you do?

Rue your losses and hold on to them? Sell your winners so that you don’t lose your paper profits? Become greedy because others are fearful? Become fearful because others are fearful? By the way, who are these others anyways?

Things look so confusing out there. And so are all kinds of advice that is floating in the news and social media. Everyone is out there to remind you of how dumb you have been and how smart they are. Stop there!

Here’s something simpler, very soothing to the soul, and very effective too, that I advise you to do now. This is the exact same advice I’ve given to myself, so we are in the same boat.

So, what’s my advice?

Let bygones be bygones. Forget everything. Start afresh.

Nobody has any clue what is going to happen, short term or long term. After the dust (sorry, virus) settles, people who will get it right will simply be the ones whom luck chose to side with. They may appear on television and remind you how their prediction went right, without revealing which one, and how their skill shone through the crisis. But, believe me, those would just be the lucky ones.

Even you don’t have any clue of where all this is heading. All you can see now and act upon now is what has happened in the recent past and how you have done through it all. Your brain, like mine, is poisoned by a heady cocktail of anchoring bias, endowment bias, availability, hindsight bias, social proof, sunk cost, confirmation bias, loss aversion, etc.

How do you maintain sanity with such poison running through your mind?

Simple. Forget everything. Start afresh. But how do you go about it? Where do you start? What do you forget?

Here’s what to do.

Take a print of your current portfolio but just the names of stocks you own. Exclude your buy price and the current stock price. This is so that you forget at what price you bought a stock and whether that is up or down from that level till today.

This is another reminder that your cost price must not matter when you are deciding what to do with your stocks today. What matters is where the stock is today, and where the business and its intrinsic value may be 10 years down the line.

Anyways, coming back to your portfolio, take a re-look at your thesis on each stock, one by one, and objectively.

Ask this question for each stock you own: “If I did not own this stock already, and of what I know now about this business, management quality, competitive advantage, staying power, long term growth, and current valuation, would I buy it for the first time today?"

If the answer is yes, keep the stock. Period.

If the answer is no, sell the stock. Period.

Then run this question on other stocks in your watchlist, this time forgetting from where those stocks have fallen or risen from.

Ask this question for these new stocks – “Of what I know now about this business, management quality, competitive advantage, staying power, long term growth, and current valuation, would I buy this new stock for the first time today?

If the answer is yes, buy the stock. Period.

If the answer is no, skip the stock. Period.

Most biases that wreak havoc on our minds as investors are creation of what stock prices have done in recent times and whether we have earned or lost money on them or have seen others earning or losing money on them.

Performance of underlying businesses – good or bad – don’t cause us much trouble as their stock prices do.

So, if you wish to really clear your mind and get into a position of some sanity as things fall apart around you, the most potent tool in your arsenal is the idea of forgetting, better ignoring, what stock prices – of your portfolio companies and those in your watchlist – have done since the time you own them and especially in recent times.

Plus, don’t listen to anyone who would remind you how smart they are and how dumb you have been. Forget them too.

Just forget everything, also forgive yourself for any past mistakes, and start afresh.

 

Vishal Khandelwal is a writer, educator, investor, and Founder of SafalNiveshak.com. This article is for general information only and does not take into account any person’s individual financial situation.

 

RELATED ARTICLES

Should investors brace for uncomfortably high inflation?

Why we’re not buying the market yet

What should you do next?

banner

Most viewed in recent weeks

How much do you need to retire comfortably?

Two commonly asked questions are: 'How much do I need to retire' and 'How much can I afford to spend in retirement'? This is a guide to help you come up with your own numbers to suit your goals and needs.

Meg on SMSFs: Clearing up confusion on the $3 million super tax

There seems to be more confusion than clarity about the mechanics of how the new $3 million super tax is supposed to work. Here is an attempt to answer some of the questions from my previous work on the issue. 

The secrets of Australia’s Berkshire Hathaway

Washington H. Soul Pattinson is an ASX top 50 stock with one of the best investment track records this country has seen. Yet, most Australians haven’t heard of it, and the company seems to prefer it that way.

How long will you live?

We are often quoted life expectancy at birth but what matters most is how long we should live as we grow older. It is surprising how short this can be for people born last century, so make the most of it.

Australian housing is twice as expensive as the US

A new report suggests Australian housing is twice as expensive as that of the US and UK on a price-to-income basis. It also reveals that it’s cheaper to live in New York than most of our capital cities.

Welcome to Firstlinks Edition 566 with weekend update

Here are 10 rules for staying happy and sharp as we age, including socialise a lot, never retire, learn a demanding skill, practice gratitude, play video games (specific ones), and be sure to reminisce.

  • 27 June 2024

Latest Updates

Investment strategies

The iron law of building wealth

The best way to lose money in markets is to chase the latest stock fad. Conversely, the best way to build wealth is by pursuing a timeless investment strategy that won’t be swayed by short-term market gyrations.

Economy

A pullback in Australian consumer spending could last years

Australian consumers have held up remarkably well amid rising interest rates and inflation. Yet, there are increasing signs that this is turning, and the weakness in consumer spending may last years, not months.

Investment strategies

The 9 most important things I've learned about investing over 40 years

The nine lessons include there is always a cycle, the crowd gets it wrong at extremes, what you pay for an investment matters a lot, markets don’t learn, and you need to know yourself to be a good investor.

Shares

Tax-loss selling creates opportunities in these 3 ASX stocks

It's that time of year when investors sell underperforming stocks at a loss to offset capital gains from profitable investments. This tax-loss selling is creating opportunities in three quality ASX stocks.

Economy

The global baby bust

Across the globe, leaders are concerned about the fallout from declining birth rates and shrinking populations. Australia, though attractive to migrants, mirrors global birth rate declines, and faces its own challenges.

Economy

Hidden card fees and why cash should make a comeback

Australians are paying almost two billion dollars in credit and debit card fees each year and the RBA wil now probe the whole payment system. What changes are needed to ensure the system is fair and transparent?

Investment strategies

Investment bonds should be considered for retirement planning

Many Australians neglect key retirement planning tools. Investment bonds are increasingly valuable as they facilitate intergenerational wealth transfer and offer strategic tax advantages, thereby enhancing financial security.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.