Take Your Losses Seriously

After a hugely successful financial year, we tend to get a rather underwhelming year. Most investors either make no returns or moderate losses. But, the fact that they had a hugely impactful previous year calms their nerves when faced with underperformance. What this induces is a false sense of security. Investors believe that “ All is well” and cross their hands over their chests hoping time will make things better. The markets have a way of testing such superficial conviction.

The market always starts by testing the weakest parts of the portfolio. The weakest stocks in a portfolio are the chinks in an investor’s psychological armour. Once, these chinks are tested or badly exposed, the investor starts worrying about other potential chinks in his portfolio. He wonders if there are other weaknesses he may have overlooked. Driven by anxiety and fear, he starts seeing even stronger parts as potential weaknesses. This can make the investor potentially too nervous even when there is no reason to be so. This situation can force an investor into actions in parts of his portfolio where no intervention was actually needed. This is a completely avoidable thing. And, there is a simple way an investor can avert selling his winners or panicking where there is no real need.

So, how can an investor avert this panic? The only way is to constantly look for weaknesses and spot them early. When you are always alert to pick weaknesses, they appear before you long before your anxiety rises. The result is that you create investment actions only to correct your weaknesses and eliminate them from your portfolio.

Importantly, when you see weaknesses early, you also see strengths clearly. So, you save your stronger positions from your own erratic behaviour in the future. You act precisely where it is warranted early enough. This keeps you composed when the markets panic later and give you the mental bandwidth to run your winners and even add to winning positions. The right frame of mind also makes you look out for newer ideas that will drive your portfolio higher.

Where you are facing losses in your portfolio, critically evaluate your mistakes early and take your losses early. This will make your portfolio tighter and improve its future profitability significantly. The time to take your losses seriously is now.

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