Market conditions remain buoyant - now that’s an understatement. You’ll be blocked on social media if you even mention the word “valuation” as investors pile into the hottest SPAC rumors and hyped IPO names (ahem… CCIV, DASH, BMBL).
Watching your portfolio value increase is great. I’ve added so many new positions I can hardly keep track of them all - and of course they are all working. That’s the market we are in. Some of the market newsletters (like the Whitney Tilson mob) are beginning to call for a “crash” or at least a major correction in the markets.
Markets do sometimes go down and in bull markets they are often referred to as “drawdowns” rather than the start of new “bear” market. I’m not addressing a shift to a bear market here but rather how to handle something like we experienced back in March. It’s not just “buy the dip!”
Market corrections are good opportunities to strengthen your portfolio so it performs better “on the other side” of a correction. It will also help you maintain your sense of calm and allow you to sleep through the night.
If you’re like me you have a bunch of “high conviction names” like a Twilio (TWLO) or simply shares in companies that are “one decision” stocks like Apple (AAPL) or Microsoft (MSFT). Then you have another group of medium names and at the bottom a bunch of more speculative names - many of which you may have learned about from somebody else. As long as they have been going up you don’t care.
[Before going further let me remind everyone that this isn’t professional investment advice for you - just one guy with an opinion offering it for entertainment purposes.]
The first step is to blow out of all the speculative names. Hit the bids on all of them, take losses if you have to and turn them into cash.
The medium names should be cut down too. I’d suggest picking the half you feel are the strongest and most important and selling the rest. Then take the rest and reduce them to 1/2 positions.
Now take the cash and invest it back into your high conviction names and one decision stocks. You don’t have to do it all at once but this is an opportunity to buy your favorite stocks more cheaply.
This puts your portfolio in a better position because these “leadership stocks” tend to be just that when the market begins to go up again. Many speculative names never come back after a major correction as people move on.
Now that you’re in a better position you can put some more time into your medium list and see if you can deepen your conviction on some of them to also add there. But now you’re doing it with time on your side.
I’ve ignored the impact on taxes on any portfolio decision making process here.
[Next up: Some basic hedging.]