If you invest actively in stocks, your net worth has probably taken a battering in the recent market tailspin, leaving you wondering what you should now do. Investment gurus tell you that corrective phases are the wrong time to hit the panic button and sell stocks. Be a patient long-term investor and your portfolio will eventually regain its past glory, is their message.
This advice will definitely apply to any orderly and well-thought-out portfolio of bluechip stocks. But, then, how many of us actually own such a portfolio? Most of us make our stock/fund purchases on impulse, ploughing in whatever surplus funds we have into whatever opportunities happen to come by at that time.
If you have been doing this over time, your portfolio may now feature scores of stocks. Start by listing out your entire portfolio in terms of the current value of each of your holding and arrive at stocks that make up your largest positions.
Go by conviction
Having zeroed-in on your top holdings, try to dredge up the reason why you added the stock to your portfolio in the first place. If you cannot recollect any solid reasoning behind the choice, it may be best to dump the stock and stick to investments you understand better.
We say this because stocks from a wide range of sectors have participated in the breathless rally of the past four years; with the result that most investment ideas, well-substantiated or not, have worked.
Going forward, with a few sectors going off the radar screens of investors , the rally may turn more selective. Therefore, even if the stock market does recover over the next couple of years, there is no guarantee that every stock you own will be in on the party!
Look for business changes
If a stock choice was backed by homework, check whether the fundamentals of the sector or the business have undergone a drastic change since you made the purchase. Rising interest rates, the meltdown in commodity prices and recent policy moves have drastically changed the earnings prospects for quite a few businesses. To cite a few examples: Instead of the stellar growth they saw in 2005-06, sugar companies are now facing the prospect of an earnings decline on a reversal in the sugar cycle.
The earnings outlook for cement companies appears distinctly weaker after the policy froze selling prices. Smaller infrastructure and IT companies may be vulnerable to the impact of the Budget proposals on Minimum Alternate Tax and Fringe Benefit Tax on Employee Stock Options (ESOPs).
Use secondary sources to get more information on these factors and their specific impact on your holdings. Where the outlook has decisively changed for the worse, don't hesitate to exit your holdings, even at a loss.
Don't wait for the right price
Most of us are reluctant to sell a stock or a fund at a price well below our `buy' price; we're always hoping to catch it just above this magic number. This can be quite injurious to your portfolio. Holding on to a lemon denies you the opportunity to deploy that money in a stock with better fundamentals and greater chances of participating in a subsequent rally.
If you have lost conviction in a particular holding or feel that business fundamentals have deteriorated beyond repair, don't transfer it to your long-term portfolio — Sell! Invest those proceeds in a stock that you've always wanted to buy, but refrained because prices appeared high. You could recoup your losses faster that way.
Hold on
After a thorough review, if you have whittled down your portfolio to just the stocks and businesses you understand and believe in, don't "book profits" on them during a correction because you believe that the stock marketis going to tank. It is always difficult to forecast where the market is going in the short term.
Therefore, selling your better holdings in the hope of re-entering the same stocks at lower prices is a strategy that may lead to missed opportunities.