How safe is your portfolio, really?
Perhaps your overall gains have taken a big hit recently and you're wondering whether it still has what it takes to reward you with great returns. Or maybe a company's poor earnings report has you worried that its best days are behind it?
You're not the only one who experiences those thoughts – even the most experienced and successful investors get that feeling from time to time. I know I've certainly experienced those emotions recently with some of my largest holdings, such as Amazon.com, Inc (NASDAQ: AMZN) and Google Inc (NASDAQ: GOOGL). They have both been smashed in the recent tech-stock sell-off. Amazon's most recent quarterly report also did little to please investors who sold it down almost 10%, adding to my pain (despite an incredible 23% jump in sales).
The same goes for many Australian stocks. Shares in up-and-coming companies like XERO FPO NZ (ASX: XRO) and FlexiGroup Limited (ASX: FXL), as well as more weathered companies like Coca-Cola Amatil Ltd (ASX: CCL), have also taken a big hit in recent times. This has caused many investors to question whether to hold on or limit their losses and sell.
When these questions start entering your mind, it is important to remember that it is the big picture that counts. Here are some tips or things to look at to help you move past these dangerous emotions:
- Think of it this way – if you didn't own the stock and it fell heavily in price, would you see it as an excellent opportunity to buy? Indeed, there would be others in the market who would be more than happy to buy it at the discounted price you'd be selling at.
At this point, you should remember Warren Buffett's two rules: Rule number 1, never lose money. Rule number 2, never forget rule number 1. - Do some more research into the companies in question to make sure you are still comfortable with their business model and future prospects before making an informed decision.
- Has any news been released that would materially influence your long-term investment thesis? That is, is there any reason to suggest that the company's prospects have been permanently hampered?
- Instead of selling a company completely, perhaps reassess whether you are comfortable with its overall weighting in your portfolio. For instance, if one stock takes up 15% of your entire holdings, maybe consider selling down and diversifying.
- Ensure your portfolio has a solid foundation which will act as a defence against any market volatility. Excellent companies to consider would be Telstra Corporation Ltd (ASX: TLS), ResMed Inc. (CHESS) (ASX: RMD) and M2 Group Ltd (ASX: MTU)
Foolish takeaway
Investing for the long haul requires immense discipline and patience. Although those feelings of doubt will enter your mind from time to time, it is important that you work through them and reassess your position in a logical manner. Following the steps mentioned above should help guide you through those testing times and help you become a truly successful investor.
