Chasing returns is not new. Neither is chasing benchmarks. In fact, the two are conjoined in the middle. When it is not the right time to chase returns, investors often make the mistake of actively chasing near-term outperformance. This comes with costs and consequences.
When it is not the right time to chase returns, an investor must accept near-term underperformance. This is extremely critical to ensuring one avoids sharp drawdowns in their portfolios. To others, this may appear as if one is not doing enough or even doing nothing. But, that is the path of least resistance to take in an overheated market.
Yet, most of us do not want to take that path. We want to play along without missing any opportunity as if our life depends on being hyperactive in our investing. The unwillingness to pause or slow down is the primary reason for sharp portfolio drawdowns. We want to be seen as active investors who can generate good ideas in any market. It is this craving that generally brings us closer to mediocre or even downright bad ideas. We end up cherry-picking in the wrong basket of ideas. That in turn, easily becomes the source of a sharp drawdown during the subsequent correction.
The past several weeks have been a phase where we should have been cautious with new ideas and choosy in allocating fresh monies. The genesis of significant portfolio drawdowns is our tendency to let our guard down during the exact phases when we must be extremely cautious. The market will always offer us a few interesting investment opportunities in specific companies even during phases like the present. We should participate in such ideas by being judicious and selective in our approach. This would mean staying true to our valuation principles, being prepared with our company research, and being willing to invest when the right opportunity presents itself.
Being selective, cautious, and opportunistic in this current phase will ensure we invest only when we need to and where we are clearly convinced. Our focus must rest on our process, research, and decision-making. Clearly, returns will need to wait and there is no point chasing returns now. On the need to outperform a benchmark, letting go of that need for a limited phase of time will give us the mental space and financial freedom to do only what is in the long-term interest of our equity portfolio.