How would you feel if the share market halved tomorrow? What would you do?
Recently, David Gardner, The Motley Fool's co-founder, co-chairman and Chief Rule Breaker ran an episode of the Motley Fool Rule Breaker investment podcast that was designed to simulate that very scenario. In the episode, David and guest host Chris Hill somberly discussed a number of big US listed companies as if they had suffered significant share price falls.
It was an interesting exercise and prompted me to review my own exposure to risk and have a think about the companies I own.
Don't get complacent with risk
After several years of leaving my portfolio alone to grow, it's fair to say I was getting a little complacent. I realised that if the market were to halve tomorrow, the plans I have for helping my family and sending my young boys to school would be at risk. A slight rebalance could quickly set that right.
Over time, risk can creep into our portfolios quite unintentionally. Maybe a small initial holding in star performer like Altium Limited (ASX: ALU) or Afterpay Ltd (ASX: APT) has grown into a significant position. Maybe you've added a little leverage along the way. Maybe you've had a family and your financial needs have changed.
These factors can all change your risk profile so it's worth reviewing your needs before it's too late. Here are some questions to ask yourself:
- Will I be needing any of this money in the next 3–5 years?
- Would I be able to sleep if my biggest holding plunged by 50%?
- Could I be forced to sell for any reason?
Remember what makes a company special
When the share market is having a bad day even great companies feel Mr Market's wrath. On days like this it's easy to feel a twinge of panic.
A good way to steady your nerves is remind yourself why you brought shares in the company in the first place. What makes them special? Have these factors changed? Probably not.
This is by no means a prediction of impending doom. But it is a reminder that gradual changes over time can go unnoticed. It can be well worth the effort to take a moment and check that our investments are still in harmony with our lives.