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%.

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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.

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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.

15 thoughts on “Portfolio Retrospection

  1. Thanks for the insightful post, R2R. Over the past few years, my risk tolerance has grown. And I’ve barely been bothered by the short-term market fluctuations. That being said, I’m still a beginner investor and I’m not sure I’m earning as much as I could be. I own a combination of blue chip stocks and index funds. And I absolutely love receiving dividend payouts every month. But the only way to keep learning is to continue investing, right?

    • Hi Kate,
      Glad to hear from you. Ignoring the short term fluctuations is the way to go. I think going with a combination of blue chip companies and index funds is very prudent of you and wholeheartedly support it. Even if you do manage to rebalance/pull some funds from your investments, constantly learning on a day to day basis is the best way to improve as an investor. Keep it up and financial freedom will be yours to conquer.

      R2R

  2. Great article, it’s important to monitor your portfolio. I like to sell options, but only do so with stocks that should I get assigned I would be happy to hold during 2008 conditions. That said I’m going to be taking some profits today. I’m going to sell MCD today, I’m ok with missed future opportunity on it because it just doesn’t fit my plan moving forward and I wan’t the cash available for what I feel are better options.

    • Hi Devin,
      Likewise, I only write options when I am leaning towards selling a position and the let the market decide for me. If I am looking to outright disown a company, I just sell it without even bothering to write options. Good to hear you are making some committed moves to take some profits off the table.

      Best
      R2R

  3. Thanks for the post R2R. We own two positions that I would rather not. In the case of each, I lost the battle with patience and felt i NEEDED to put some money to work. Haha, I usually keep that impulse in check, but I lost this battle. Anyway, I don’t usually have the problem of wanting to panic and sell. Typically, we’re putting more money to work during panics. Great timing on your post by the way, I published one this morning on exactly that.

    I hope you had a great weekend buddy

    -Bryan

    • Timely article indeed. Sorry, have been traveling for an extended long weekend and finally got back home now. I hear you on constantly trying to fight the battle…and its good that you have atleast identified that there are two positions that you would rather not own and was somethign that you saw as a forced hand.

      Best
      R2R

  4. Hey R2R,

    Interesting questions that you ask. Do you own something you want to sell? not really, I own the index, and I am quite happy with my 3 trackers.

    Early July, I decided to slow down my investment with about 25pct and put away that cash for a future dip. It is not totally timing the market, I still invest each month, just a little less now.

    However, the recent events have increased my curiosity of a half index half dividend portfolio. I am still in the thinking-it-through process. Main open points are: how much pct trackers vs stock and how much stock in total?

    • Thanks for sharing your thoughts, amber. I think when it comes to index/passive investing, you cant go wrong with dollar cost averaging – definitely a good way to average into a position and let the market do what it does best.

      R2R

  5. This article is spot on. People should be monitoring their portfolios semi -regularly, but more importantly, they should be diversified and not so anxious to sell whenever there’s a drop. That tells me that that person went into the market without a strategy and is just letting the “wind” dictate where their money goes. You see people that hate the stock market because they put it all into one tech stock and that company went under. One should have a broad strategy and a diversified portfolio, or else you WILL lose money. Having those things ensures that you will come out ahead.

    Sincerely,
    ARB–Angry Retail Banker

    • Hi ARB,
      Thanks for sharing your thoughts. It still boggles my mind on how many times I read people putting most of their money into one or two companies. I just read this morning on Seeking Alpha someone comment that he/she has 1/4 of his/her savings in the AMGN stock! That sounds insane to me – yes, I am bullish on the company, but there is no way in hell I would put that much of my total savings into one company. A diversified portfolio means that you will underperform when compared one of the indexes that the media will highlight at the end of a quarter or year, but over time – the if the picks are done well, long term DGIs will come out on top.

      R2R

      • If anyone ever thought having their money in one stock is a good idea, I urge you to look up GT Technologies. You can read a message form thread with people talking about the stock, their partnership with Apple, and soon the fallout as the company out of nowhere declares bankruptcy and people have nothing left. One woman with a special needs child had to host a yard sale and then sell her house to make ends meet, and another man nearing retirement woke up one day to the fact that he was going to have to work until the day he died.

        It’s truly heartbreaking, but it’s also baffling at how these people put literally everything they had into one stock. I wouldn’t put my entire net worth into KO!

        • I read those stories back when GTAT stock crashed and it was depressing! Almost every single financial advisor worth his/her salt says to diversify. I still dont understand how these warnings are not taken seriously by retail investors.

          R2R

  6. Great article R2R. Sometimes we get so focused on an individual stock level that we lose sight of the larger picture that is our whole portfolio. What if you found 5 oil stocks that were discounted and are suddenly over-weight in oil as a result? Could you have used the funds to purchase a different discounted stock that help achieve further diversification while providing the same dividend benefits? You can’t lose sight of the forest!

    There are a lot of lessons that cn be learned from the recent volatility. we should all take step back and see what we have learned. Were you too quick to buy stocks? Did you decide to continue to wait and see if prices fall only to find yourself staring at 5 straight green days? We will never grow as investors if we don’t reflect and find areas of improvement!

    I actually have been doing some reviewing of my broader portfolio and stumbled on something I need to correct. I couldn’t agree more that this is a healthy exercise that we all need to perform.

    Thanks for the great article!

    Bert

    • Glad you liked it, Bert. Thanks for sharing your views…always appreciate it. Well put, that we shouldnt lose focus of the forest when looking at one tree.
      I have been reflecting a bit too (as you can tell from the article), and I realize that I do tend to pull the trigger a bit too quickly when a stock is falling. But I take comfort in the fact that I might be overpaying a wee bit and are comfortable with the valuation when I purchase as I know that I will never be able to time things perfectly. For e.g., last month, I saw biotech falling and picked up AMGN at ~$145 and teh stock continued to fall to as low as $138. In the long run, it wont really matter as I think I still like the valuation at these levels.

      Best
      R2R

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