Last year, we experienced a market crash. This year, investors also had a fair dose of market volatilities and uncertainties, especially in the China markets. And the biggest mistake we noticed is that many investors abandon the investment portfolio or holdings that don’t seem to be making money within a certain short time frame.
As I occasionally scrolled through investing forums, I noticed it is not uncommon to see some asking whether they should be closing off their positions or shifting their funds to other holdings.
The reason? Portfolio drawdowns, or portfolios earning meagre returns of just a few percent.
Here Are Some Examples I Saw
During the China tech massive selloff, there were many investors contemplating whether they should be selling their stocks and many others who actually sold off their stocks at very low prices. Then, there are also some whose current robo advisor portfolios are not doing well and are concerned about whether they should be shifting to another robo advisor.
What they don’t realise is that, they are losing money and could be losing even more money than they thought!
Firstly, those temporary paper losses are going to crystallise into real losses. Secondly, they are incurring the opportunity costs for giving up the potential gains in the future. The worst is to see the prices rallying back up shortly after selling off those investments that they thought are not going to make money.
The Underlying Problem
Well, all these only point to one thing. Investors do not understand the markets well enough. They do not have conviction or even a clear understanding of what they are invested in. Investors think investing is the means to get rich quick.
The stock markets move in cycles. Yes, no doubt some stock markets like the US stock markets move up over the long term, but it doesn’t move up linearly. In between, the prices move in a cycle. After periods of strong price rally comes periods where the rally gets weaker and prices decline before they go back up on a rally again. Which means you are definitely, or I can even say 100%, going to be experiencing dips, corrections, drawdowns, crashes along your investing journey if you are in it for the long term.
What We Should Be Doing
Therefore, before we even begin investing, we need to have the right mindset that we will be seeing negative numbers, or the red numbers in our portfolio at some point in our investing journey.
Short term price performance should never be used as the sole gauge as to whether an investment is a good one. Because the stock market can be pretty irrational in the short term, so anything could possibly happen to the stock prices. The key lies in whether we are making a good investment, or buying a good company for the investment. This is where having the right knowledge to understand the business of a company comes in. You need that to develop a strong conviction in the investment. When we do not understand what we are investing in, it is easy to give in to emotions like fear and panic when we see price declines.
For example, companies like Alibaba and Mastercard have been losing favour among investors because their stock prices have not been performing for the year. Some investors even said that Alibaba stock is just trash and we have some asking why Mastercard stock prices are not moving up. We should instead be focusing on the fundamentals of these companies, not the stock performance in the short term. Over the long term, these companies with solid fundamentals are going to be performing well. The moment you give in to the panic selling, you have already lost the battle.
In fact, even though Mastercard’s YTD returns for 2021 are almost flat, it is one of our top few performing holdings in our portfolio as we have employed our Moneyball stock investing strategy and with options play. This is why we have been emphasising that we need to have a bag of strategies in mind so that we know what to do under different market conditions.
The Same Goes For Robo Advisor Portfolios
While robo advisors are a convenient option for investors these days, we should still do ourselves a favour by learning some essential knowledge of the markets and the various investment instruments. After all, the portfolios that robo advisors built are made up of the same type of underlying investment instruments that we have in the markets! Ideally you should have a sense of how investing works so that when you face drawdowns in your robo portfolio, you can make educated judgement of what to do next.
Do not assume that investing is the easy way out to get rich fast. This is the most dangerous mindset to have. Give your investments some time for it to grow, unless the fundamentals have worsened or the investment is a bad one to begin with, then yes, you should be trimming the positions or cut losses altogether.
If you wish to shorten your learning curve to become a more savvy investor in the stock markets, you may check out our upcoming workshops here.