Finance Reflect on what you’ve learned If you’re reading this magazine, you’re definitely old enough to know that every crisis, every difficulty, every “rough patch” we go through in life has the potential to teach us something − if we’re paying attention. And, while it’s not our intention to minimize the financial pain you’ve been through, chances are that this bear market has taught you a few things about how the market works (and, sometimes, doesn’t work). As you start the process of healing your portfolio, take some time to reflect on what you’ve been through, and what you can take away from it. What have you learned about the markets? About the specific assets and businesses in your portfolio? What worked for you – and what didn’t? What mistakes did youmake?What mistakes did you avoid? What did you learn the hard way? If you can walk away from the bear market a wiser, more knowledgeable, more mentally resilient investor − well, that’s a pretty good return on investment, one that is sure to pay dividends in the months and years to come. Simplify If your portfolio has suffered significant harm − either from extreme volatility or because of less-than-stellar investment choices − it’s often a good idea to simplify things by paring back the number of investments inside of it. Trying to assess too many holdings, or keeping your eye on too many investments at one time makes it difficult to maintain focus on your long-term goals. Howmany holdings should you have in your portfolio?That’s a very individual choice, one that depends on your risk tolerance, financial goals, investment experience and (let’s be honest here), your attention span. But a good starting point is to eliminate any holding that currently comprises less than two per cent of your total holdings. Such small positions are probably not substantial enough to make a big difference to portfolio gains, but are large enough to be distracting and keep you from focusing on more important issues. Clean up the losers Closely related to the point above. When you review your holdings, you’ll want to take a more focused look at specific positions that have been heavily hurt by the bearmarket. Ask yourself: have the investment fundamentals (profit outlook, earnings growth, sector forecasts, broader economic developments, etc.) changed radically since the downturn started? Do these holdings still align with your longterm goals? Does holding them fairly reflect your beliefs in their future prospects − or do they reflect your reluctance to acknowledge and move on from your mistakes? Pay particular attention to investments to which you’ve developed an emotional attachment, businesses or products which you use yourself, or stocks that have performed spectacularly for you in the past and that you’re reluctant to give up. Approach the clean-up process with a cold, clinical eye and focus on the opportunities ahead, not the past. Take it slow Your body doesn’t heal itself in one day… and neither does your portfolio. Resist the temptation to make up for significant losses with quick, decisive action. Instead of buying or selling everything in one fell swoop, make incremental moves, shifting in or out of positions over a series of days, or even weeks. Remember: a person with a broken leg doesn’t suddenly leap out of the hospital bed and run a marathon the next day.There’s a steady, stepby-step movement toward a long-term goal that gives the body time to heal properly: first crutches, then a cane, then walking around the block and finally, running. Sure, taking the same conservative approach with your portfolio couldmean that you leave some gains on the table because you didn’t go “all in” at the right time. However, it will also help you avoid some of the problems that come along with forcing the healing process too fast. Be deliberate about risk Sometimes after an injury, we think that the best thing to do is to get back to the gym/yoga class/golf course as soon as possible. Sounds good in theory. In reality, however, returning back to activity without giving our bodies time to heal is often what leads us to re-injury. The financial equivalent is to take on aggressive, high-risk trades in an attempt to rebuild our portfolio as quickly as possible. Sure, sometimes such bets pay off. Other times, they don’t. But more importantly, they often land you exactly where you were before the crisis hit: with a portfolio full of speculations and gambles, rather than one that’s aligned with your long-term goals. Let’s be clear here: We’re not suggesting that you should eliminate all risk altogether (see note above on the “paralyzed” portfolio). Rather, you should be deliberate about the risks which you accept. Think carefully about your speculations: make sure that you’re able to articulate a clear investment thesis. Make sure that you have an exit strategy. And don’t take on more risk than you can handle. This is not a time to blindly make big bets in an attempt to shortcut the healing process. Portfolio first aid The first goal of any trip to the doctor or the hospital is to stop the damage. Call it “first aid” for your portfolio; actions that you can take relatively quickly which should have a significant, lasting effect on its overall health. CSANews | SPRING 2020 | 29
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