Investing in shares is often described as simple but not easy. Yet for much of the past twelve months, making money in the markets seemed to be just that: simple and easy. It felt almost effortless. Every approach, from well-thought-out strategies to pure intuition, seemed to deliver great returns. The more you invested, the more you earned. The less you understood the risks, even if it was part of your family’s future, the richer you became.
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But that era may be over. No one knows for sure; perhaps an even greater opportunity lies ahead. Still, the recent stock market sell-off has forced investors to take a pause – and that’s a good thing. This is why.
First, true performance is not measured by how your portfolio does in a steadily rising market, but by how well it holds up when things go bad. If your portfolio has fallen less than the market during this recession, pat yourself on the back: you’re clearly on the right track. However, if your portfolio has taken a steeper dive, it’s a sign that something is wrong. This market downturn offers a valuable reflection on where you stand as an investor, and it’s a lesson that may be overdue.
Second, if your portfolio has indeed underperformed the market, this could be an indicator of excessive risk-taking. You may have been seeking returns without sufficiently considering potential losses. Now that the downside has arrived, you pay the price. Hopefully you don’t have too much influence and this experience won’t prove too expensive. Either way, this correction is an opportunity to better understand your risk tolerance and adjust your portfolio to your comfort level. The era of mindless pursuit of returns should probably end here.
This brings us to the third point: for some, this could be an ideal time for a complete financial reset. Few investors follow a clear plan to achieve their life goals, often jumping from one investment opportunity to another (the most recent may be defense sector funds). Many became overexposed to equities and even shifted money from safer fixed deposits. With markets lower, these investors are feeling the pain. Imagine going from a stable 7% in fixed deposits to a -20% loss on equities: that’s a big blow. This market sell-off should serve as a wake-up call to create and stick to a long-term financial plan and balanced asset allocation.
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This is not just theory. Time and again it has been shown that well-diversified plans hold up better in times of recession. Over the past month (since the market peaked on September 27), we’ve seen this happen across asset classes: the Sensex is down about 10% (and some individual stocks have fallen much further); gold is down only 4%; real estate remains stable; and bank cash positions and fixed deposits have increased. A balanced portfolio tends to stabilize losses.
When it comes to mutual funds, the difference is even clearer. In the past month alone, some stock funds have fallen more than 10%, while others have lost just 4%. The results come down to how well you selected your stocks and funds.
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If you have managed to maintain this balance well, congratulations, you are ahead of the curve. Your portfolio is out of line with the market and you are performing better. But for those hit hard, this is a chance to reassess everything. Use this as an opportunity to prepare yourself for the next big upswing.
Rahul Goel is a finance and publishing professional with over 25 years of industry experience. You can tweet him @rahulgoel477.
Always consult your personal investment advisor/asset manager before making a decision.
