"Investing is simple, but not easy." Anyone who has attempted to add to their portfolio this year will likely have felt these words uttered by Warren Buffett deeply.
Even after the recent market rally, Australia's pre-eminent benchmark — the S&P/ASX 200 Index (ASX: XJO) — is down 6% since '21 ticked over to '22. Only 58 companies of the top 200 have escaped the red-painted perils of scorching hot inflation, blistering rate rises, and tectonic sentiment shifts. That means 71% of the biggest and most-established companies the ASX has to offer have delivered a negative return in 2022 so far.
What is most unsettling is that even highly regarded companies have experienced share price falls in excess of 20% during this time. Take the likes of REA Group Limited (ASX: REA), Sonic Healthcare Limited (ASX: SHL), and Domino's Pizza Enterprises Ltd (ASX: DMP), which have descended by around 27%, 28%, and 48% respectively.
Sadly, these are the circumstances that can lead to restless nights. Hours lying awake, staring at the ceiling, pondering the possibilities of more financial pain. This is a telltale sign that some changes should be made to your ASX share portfolio.
Here are my three downright cinch ways to get the best shut-eye in a volatile market.
Image source: Getty Images
My 3 steps to sleeping like a baby in an ASX share sell-off
Ideally, these three actions would be taken prior to the share market being engulfed by selling. However, the second-best time is now.
1. Reassess your risk
Generally, if your ASX share portfolio is keeping you up at night there's a good chance there's a mismatch between the risk you're comfortable with and the risk present in your investments.
It can be difficult, but the most valuable decision one can make in investing is to have an honest conversation with oneself. When it comes to understanding your risk tolerance, there are two important questions: What is your time horizon? And how much are you willing to lose?
Many will be tempted to overestimate their risk tolerance, justifying a higher potential return. However, it is critical to think about the answers honestly and sincerely. It can be helpful to pose the question differently, asking: if I invested X amount and it fell by Y percent, what difference would that make to my life, and am I okay with that?
Keep analysing those hypothetical scenarios until you reach one where you would be comfortable with the potential downside — your ASX share portfolio should reflect this.
2. Spread your portfolio
The temptation to go all-in on one or two supposed 'guaranteed' 100X ASX shares is always alluring. However, taking such an approach to investing greatly reduces the chances of capturing the magic of compounding.
In my opinion, there are two types of investors in the world: those who occasionally pick big losers, and those who don't admit they do. The odds are you will experience a bad investment. Your mission is to ensure it doesn't undo all your progress overall.
No matter how 'sure' of a moneymaker one ASX share might appear to be, diversification is of paramount importance. In short, avoid holding a significant portion of your personal wealth in any one equity investment.
Now, a 'significant portion' will differ from person to person, but a good rule of thumb is keeping a single position below 25%, for even the most risk-tolerant investors.
3. Lose the leverage, get rich slow
Leverage… Some people love it, some people hate it. I personally think that the expeditious path is rarely ever worth its associated risks.
If your ASX share portfolio is keeping you up at night, it's probably a good time to do away with the debt. Not using leverage? Don't even consider it if your non-geared portfolio is already giving you night terrors. Ultimately, the choice is yours. I can't offer personal financial advice — though, I'd quote Buffett for my view here:
Never risk what you have and need for what you don't have and don't need.
Enjoy a more restful night!
