The past 3 weeks was disastrous and the stock market started dropping from Feb 16 high, due to several reasons. The rising treasury yield, better economic growth sentiments and rising interest rate expectations meant that there are better asset class out there to hedge against inflation, hence growth and tech stocks in particular, took the biggest hit.
The S&P 500 index saw a fall of around -3.19% while the NASDAQ-100 index saw a fall of -8.51%.
My portfolio was not spared at all, as I saw a drop of approximately -13% in my equities portfolio, essentially wiping out nearly all of my 2021 gains (excluding crypto).
My DIY portfolio is mostly tech and growth stocks right now, so I expected my portfolio to decline way steeper than the broad market indexes because that is just what my portfolio’s characteristics is. In a bear run, my portfolio will face the most pain but in a bull run, my portfolio will run faster and it will go high up than a broad based index as well.
I was lucky to take profit from my Equity100 before the correction and recycled some capital into my DIY portfolio which I am buying/selling using Firstrade.
Despite the stock market correction, I did not sell any of my stocks, in fact, I bought in even more and I have added positions in NVDA, ARKW, and more BABA.
However, there are still a few lessons here that I learnt and what can be done to mitigate against such drawdowns in our portfolios.
Always have a warchest ready
It is only during such market downturns when the discount and buying season is here. One of my mistake this time round is only having 10% warchest ready and hence, I only had 1 bullet to buy into the market and no more to average down as the market continues to fall.
Having this additional amount set aside to buy into stocks when prices are depressed is extremely important because that’s when money gets transferred from the impatient to the patient.
Yes my portfolio is already diversified. I have tech and growth stocks, Syfe Equity100 to cover across different sectors and styles with 1500+ stocks exposure, as well as crypto holdings which is uncorrelated to the stock market and ever growing, but going forward, I may start to diversify into value counter plays such as Berkshire Hathaway once again if prices were to hit my intrinsic value.
My DIY portfolio is heavily tilted growth stocks which will be hit the hardest during bear runs and with rising interest rates, tech stocks will get beaten down even further, so it is better to be prepared for future concerns of your own portfolio to better mitigate against the impending risks.
Focus on fundamentals, not hype
It is easy to get swayed by greed and the urge to buy into stocks that just keep going up up and more up.
Prominent examples include Gamestop (GME), AMC, Nio Inc, Palantir, Tesla, Lemonade and many more but these stocks are pretty hyped up and the market exuberance is real here. Ever heard of Tulipmania? Yep, these stocks are pretty much Tulipmania of the 21st century.
As Warren Buffett said, it is far better to buy a wonderful company at a fair price than a fair company at a wonderful price. And this is because fundamentals matter in the long run.
Be a comprehensive analyst
While strictly using fundamental analysis and critically analysing financial statements may not be an effective strategy on its own, we also need to be able to identify future trends beyond the balance sheet of companies and also how the management is growing the company moving forward.
Value investing is not merely looking at financial ratios such as ROE/ROA/Operating Margin or Debt-Equity Ratio, it is more than just analysing the fundamentals of a company.
A growth company measured using traditional methods will be deemed a sh*tty investment and likewise a dying company might have excellent fundamentals but their revenue growth is negative.
Once you understand that while fundamental analysis can give us clues about how well a company is performing, those are all in the past, the earnings and cashflows and revenues are all earned by the company already. Look forward and think about what will lead the company to further growth, with cost of capital of around 7%-8%, is the company you are invested in able to surpass their cost of capital and generate shareholder value in the future?
To all readers and friends who equally felt the impact of the recent market downturns, do not fret or panic. If you still have spare cash lying around, now may be the time to deploy some into the stock market but do so prudently and look out for opportunities. Whether the market is going up or going down, there will always be opportunities in the market.
Don’t sell out of your investments out of fear and understand that market declines are perfectly normal and it is part and parcel of the stock market.
Market will always go up and go down sometimes but if you are invested in great companies and diversified, your portfolio will trend upwards eventually in the long run. Stay patient and trust the process.
If you are an investor, buy and hold good companies and if you are a trader, be disciplined in your stop-loss and target price.
Moving forward, I am looking to increase my crypto allocation even further to 40% of my portfolio and I really urge readers to really understand the Bitcoin thesis and why it is such a compelling investment for the long run.
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The content here is for informational purposes only and should NOT be taken as legal, business, tax, or investment advice. It does NOT constitute an offer or solicitation to purchase any investment or a recommendation to buy or sell a security. In fact, the content is not directed to any investor or potential investor and may not be used to evaluate or make any investment.
Do note that this is not financial advice. If you are in doubt as to the action you should take, please consult your stock broker or financial advisor. (Or contact me!)