Everyone knows Warren Buffett’s famous quote of “Be fearful when others are greedy and greedy when others are fearful.” In over 30 years, I’ve met few who practice this when it comes to that point in time though.
I wrote an article back in early September ‘The Market is Wobbling. Here’s How to Protect Your Portfolio.’ If you didn’t heed that advice your current move could well be to manage the losses as most names feel like they are a melting ice cube right now. I know certainly some of my companies do.
Even seasoned investors might be caught off guard by the volatility of the stock market. Now imagine that instead of viewing these changes as obstacles, we viewed them as openings ready to be explored. Let's go into the science of turning strategic disadvantages into tactical advantages and how to weather market downturns. When reading, you will probably agree with most of them. The real key is ensuring you practice them at the correct time. Remember this last point.
Manage Risk Not P&L
Regular readers will know that I am a huge fan of evaluating risk first, not P&L when I start my analysis. Even if high returns are appealing, successful long-term investors are generally distinguished from those who struggle by their ability to control and limit losses through effective risk management. According to the old saying, "It's not about timing the market, but time in the market." Investors can keep their money in the market for longer periods if they take steps to reduce their exposure to risk. Manage the risk and you’ll be around for a long time. Trust me on this, I’m old and experienced. Managing stock market losses is crucial for both the emotional well-being of an investor and the health of their investment portfolio. Here are some strategies and steps to consider.
The Emotional Rollercoaster: Keeping Calm Amid Market Turbulence
Another theme that runs through most of my writing is emotion. The loss of money is one of the more stressful emotions you’ll have, and it can make you do wild things. Even seasoned investors might get emotional over market volatility, which can mimic a rollercoaster. The stock market's emotional rollercoaster can cause excitement during bull runs and anguish during bear runs. This volatility forms part of investment, so remember that. Keeping cool during market instability is a test of emotional strength and a key to long-term investing. The emotional confusion might cause rash decisions that ruin investment plans. Investors can handle market turbulence and avoid emotional decisions by staying calm and focused on long-term goals. Emotional reactions can exacerbate losses. It's essential to remain calm and avoid making hasty decisions based on short-term market movements. Think Buffett.
Align Your Portfolio With Long-Term Goals
To match your portfolio with your long-term goals, strategically align your investments. Define your financial goals for retirement, buying a home, or paying for school. Assess your investments to see if they support these goals. Diversify assets to balance risk and rewards and update your portfolio periodically to stay on track. You can achieve financial success by regularly matching your investment decisions with your goals. Set a time when you do this. Perhaps its monthly, quarterly, or half yearly. It can even be once a year and you could use a financial advisor to optimize your liabilities. Review your investment goals and time horizon. If your long-term objectives haven't changed, it might make sense to stay the course. A downturn in the market is a blip with a 10-, 20-, or 30-year view.
Buy Companies, Not Markets
To succeed, ultimately you need to understand what you are investing in. There is a huge difference between trading adhering to market trends as opposed to company specific issues. You must separate them. By doing so, you ensure that your investment strategy is not only informed but also tailored to the unique characteristics and potential of each individual asset, rather than being swayed by broader market sentiments alone.
Avoid chasing 'hot' investments. Trying to recoup losses by jumping into the latest trending stock or sector can be risky. Meme stocks are a very good (bad) example of this. Stick to your investment strategy and avoid speculative bets. An investor who desires an exhaustive understanding of a particular company should conduct extensive research. This entails examining the company's financial statements, evaluating its management team, and comprehending its business model and competitive landscape. Additionally, it is advantageous to remain informed of the company's quarterly earnings calls and any significant news or developments. In addition, understanding the broader industry trends and the company's position within that context can provide insightful information. By delving deeply into these factors, an investor obtains a comprehensive understanding of the company's strengths, weaknesses, and potential growth paths.
Educate Yourself. Understand the reasons behind the market downturn or the poor performance of specific stocks. Is it a broader market trend, or is it specific to certain industries or companies?
An investor's education is most effective when it includes both high-level overviews and in-depth studies of the market. I don’t like most publications out there, but you should subscribe to and read reputable financial news publications like Bloomberg or The Wall Street Journal daily. I subscribe to both. I also think Barron’s is a great publication and what better than signing up to this blog and Barchart of course. Research niche publications, like TechCrunch for tech trends, to learn about the dynamics of your field. Detailed information about certain equities can be gleaned through quarterly reports and earnings calls posted on investor relations pages. Participating in investment forums like Seeking Alpha might provide access to unique perspectives, but it is still important to verify any information you find there with independent research. The last point here is of paramount importance when investing.
When Should You Take a Loss On An Investment?
Taking a loss on an investment depends on several factors, some of which are purely analytical and others that are deeply personal. There may be a need to reevaluate the asset if there has been a significant change in the company's position, management, or industry. Rebalancing a portfolio when there has been unbalanced growth in assets may require selling assets at a loss. Tax factors, notably tax loss harvesting, might also factor into such choices; however, "wash sale" restrictions should always be kept in mind. Asset liquidation may be necessary due to the pursuit of personal financial goals or the necessity for cash, or simply due to the psychological toll of maintaining a highly speculative investment. Better investment opportunities abroad can also be a justification for redistributing capital. However, it's important to proceed cautiously while making such choices, rather than reacting emotionally to market swings.
In the long run, accepting that losses are a part of investing and learning from them can help you become a more resilient and smarter investor. In the near term, the stock market is naturally volatile, but historically, it has trended higher over considerable time spans. It's critical to approach investing from a long-term perspective and avoid being overly influenced by shorter-term market changes.
On the date of publication, Jim Osman did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
