So Your Portfolio’s Plunged. Now What?

So Your Portfolio’s Plunged. Now What?
Reda Farran, CFA

about 2 years ago6 mins

  • Markets are falling, but instead of panic-selling, you should be formulating a strategy of what best to do with your portfolio in light of the current market environment.

  • Start off by rebalancing your portfolio and re-evaluating your asset class weights, and then consider protecting your portfolio against more losses using put options.

  • Revisit the investment theses of all your individual stock holdings, form a smart plan of how to buy the dip, and, finally, make sure you learn from what happened.

Markets are falling, but instead of panic-selling, you should be formulating a strategy of what best to do with your portfolio in light of the current market environment.

Start off by rebalancing your portfolio and re-evaluating your asset class weights, and then consider protecting your portfolio against more losses using put options.

Revisit the investment theses of all your individual stock holdings, form a smart plan of how to buy the dip, and, finally, make sure you learn from what happened.

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Markets took a beating last week, and chances are your portfolio is down. Now as nice as it sounds to sell all your investments and buy them back later at a lower price, it’s virtually impossible to time the market perfectly when you sell, let alone again when you buy back in. A better move, then, is just to roll with the punches. Here are some ways to do just that.

Rebalance your portfolio

If you invest by setting target allocations for various asset classes, you’ll find that your portfolio has drifted away from those targets after this bout of market volatility. So the first thing you should consider is rebalancing your portfolio to bring it back to its intended allocation.

Rebalancing, after all, forces you to take profits on asset classes that have performed well and to invest that cash into asset classes that have fared badly and are consequently cheaper. This makes sure you buy low and sell high, which is what every investor should be trying to do.

Re-evaluate your asset allocation

During the process of rebalancing your portfolio, it might be wise to first take a step back and re-evaluate your asset class targets – especially in light of the current market environment. What’s happening right now is that central banks have dramatically shifted their tones after a year of claiming that skyrocketing inflation is just transitory, and they’re starting to raise interest rates to slow down spiraling prices. Some asset classes and sub-asset classes fare better than others in a rising interest rate environment, and so this might warrant a change to your portfolio’s target asset allocation.

Government bonds, for example, perform poorly in that scenario, so you might want to lower their target allocation in your portfolio. You could also lower your bond portfolio’s duration, or replace some of the allocation with loans that have floating interest rates (see my previous Insight to learn more).

Likewise, you could tweak your stock allocation by swapping growth for value and adding some bank stocks – groups that fare better in a rising interest rate environment. It could also be worth introducing a new asset class allocation to your portfolio: real assets, like commodities, natural resources, real estate, and infrastructure. Real assets offer inflation protection and a source of income, they’re resilient to rising interest rates, and they look a lot cheaper than stocks and bonds right now. Finimize analyst Stéphane has a few ideas about how to invest in them.

Inspect your stock holdings

If you own a bunch of different stocks, it’s worth properly revisiting your investment thesis for each one. It doesn’t matter whether the stock is down or up – the key question to ask yourself instead is as follows: if I didn’t already own this stock, would I buy it? If the answer is yes, resist the urge to panic sell now that prices are falling. You might even want to invest a little bit more if the price drops below a level you’ve predetermined. These are ideally stocks of high-quality, profitable companies that are being indiscriminately dumped by investors during the recent market selloff.

If, on the other hand, the answer to that question is no, consider selling your position – even if that means realizing a loss. Remember, in this current rising interest rate environment, the market is unforgiving of speculative, expensive-looking growth stocks with profits far out in the future. That’s because these profits (if any) are worth much less when discounted back to today at higher interest rates.

Protect your portfolio against more losses

Sometimes the best thing to do during a bear market is nothing. Take a breath, turn off the news, and don’t check your account balances. That’s especially true if you have a sensible portfolio diversified across different asset classes, and your individual stock holdings all have sound investment theses that are still intact. But in case last week’s selloff is just the beginning of a bigger market crash, it might be wise to buy some insurance to protect your portfolio in case this is the start of something bigger.

You can easily do this without having to touch any of your existing holdings by purchasing out-of-the-money put options on stock market ETFs. The additional benefit of using options is that their value increases with volatility, so they can protect you against both falling stock prices and rising market volatility. Just note that if markets end up going sideways or rebounding, you’ll lose the entire option premium, which is the cost you have to pay for crash protection.

Form a plan around buying the dip

Long-term investors know that the market will eventually recover, and you should be positioned for such a rebound. So if you have some spare cash that you were planning to invest anyway, you should view any stock market crash as an excellent buying opportunity. But don’t just blindly buy the dip every time the market falls – have a smart way to go about it instead.

One way to do that is via a strategy known as dollar-cost averaging: buying a constant amount periodically, regardless of the asset’s price. Let’s say you had $2,000 that you wanted to invest in an S&P 500 ETF. You could, for example, invest $400 into the ETF every week over the next five weeks. That strategy reduces the impact of volatility on the overall purchase and removes any element of trying to (unsuccessfully) time the market.

Another option is to split your investment as the stock market hits progressively lower levels. For example, the S&P 500 is currently hovering at around 4,400: you could split your $2,000 into five $400 portions and invest each one every time the S&P 500 drops by 200 points. So you’d invest $400 at 4,200, another $400 at 4,000, another $400 at 3,800, and so on.

Learn from what’s happened

The best investors in the world don’t get emotional or blame external circumstances for their losses. They own up to their mistakes and learn from them. Only by learning from mistakes can you avoid repeating them, which will help you avoid big losses again in the future.

So if your portfolio took a disproportionately big hit over the last week or two, it’s very important to ask yourself why that happened. Were you, for example, overly concentrated in tech stocks and other assets that basically move in line with tech stocks, like crypto? Then that’s a genuine mistake you’ve made, and the key lesson to take away is to better diversify your portfolio across different stock market sectors and asset classes that don’t move in the same way in a given economic environment.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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