March 2024 treating your portfolio badly? Read this…

If you had too much exposure to the racy segments of the stock market, you took quite a bit of a knock. (Image: Pixabay)
If you had too much exposure to the racy segments of the stock market, you took quite a bit of a knock. (Image: Pixabay)

Summary

  • A well-allocated basket of assets ensures that you are not riding a roller coaster and instead you are gradually moving up in life, as steadily as possible

When things are good with the markets, you are most likely to get the following questions:

How are your stocks doing?

Which stocks do you own?

What’s the return on your stock portfolio?

Sometimes, the last question has an “annual" leaning stuck into it – What's your portfolio return over the last year?

I bet over the last one year you were peppered with such questions everywhere you went. After all, these are valid questions. All exclusively asked during bull markets.

When markets fall, as they have over the past couple of weeks, almost no question is asked. In fact, you probably dread being asked these questions.

While this behaviour is natural, I want to focus today on the primary question you should ask yourself every time you review your performance. Irrespective of how markets are doing.

I'm addressing this today because the markets have taken a knock in recent days. As a result, unbridled greed, and belief in one’s ability to make a killing by punting in the markets is kind of subdued. This might create space for registering some potentially solid advice on asset allocation.

Even before getting to the questions, let me ask you…Do you have a good sense of your net worth? (Net worth is all your assets minus liabilities which includes loans).

If you do, you are already in a good place. If you don’t then, well, you really need to pull out an excel worksheet and get started right away.

Let us assume you have a fair sense of what’s happening with your net worth and move ahead.

Here’s a broad recap of what happened over the last two weeks. I will try and be granular, but not too much so we don’t get lost in clutter.

Gold rose sharply as the Federal Reserve governor breathed life in hopes of interest rate cuts in the US.

Property value doesn't really change in such a short time frame. The price definitely does not change day to day, yet the rent continues to accrue and gets paid out at a fixed rate and frequency. So, this asset class is neutral.

Debt is a bit more complicated. Money in savings bank accounts and fixed deposits of course continues to grow at a fixed pace. Debt funds probably got a slight bump on positive news (Bloomberg Bond index inclusion, US Fed reserve governor talk)

Large-cap stocks, while down, showed why they are called bluechips (at least the select few of them classified as such). They largely fell too, but not much.

Mid-cap and small-cap stocks took a large knock. SME stocks an even bigger knock. The trigger could probably be narrowed down to regulatory action, and also warnings by the regulator.

In the above picture, two things stand out – the relatively sharp rise in the price of gold. And, the very sharp sell-off in stock prices of mid, small and SME stocks.

Now, depending on how you are allocated across asset classes (and within stocks, across segments), you were buffeted accordingly.

If you did not have gold, then perhaps you did not have an asset to counter the “bad times".

If you had too much exposure to the racy segments of the stock market, you took quite a bit of a knock. Perhaps the gold shielded you slightly. Perhaps a fair allocation to property and cash provided an anchor as well.

In short, to someone who looks at the bigger picture, it was all normal. Prices of some assets move up, and others move down. A well-allocated basket of assets ensures that you are not riding a roller coaster. Instead, you are gradually moving up in life, as steadily as possible. (of course, there will be knocks, more of this later).

This leads me to the only question that matters…and that you should be asking yourself over time:

How am I doing in terms of growing my net worth over time?

I have almost never heard anyone ask this question. The question, as I suggested above, is always about the hottest investment class. If stocks are doing well, it’s about stocks. If gold is doing well, it's about gold. If there is a meltdown, we are all probably going to focus on our work and professions.

You see, discussing net worth can be boring. Last year, as stocks rallied sharply, sometimes by hundreds of percentage points, a well-allocated net worth probably increased by only about 20% (this is a generalization, of course). You see what I'm getting at – in conversations at parties, narrating a 20% return doesn't really excite anyone!

On the other hand, when stocks start to fall rapidly, like what we have seen in the last two weeks where portfolios focused on certain segments could have collapsed by 15% to 30% or perhaps a lot more, one’s net worth probably moved by about a marginal 1% or 2% at most.

Now, why do I call the net worth question the most crucial? Well, the fact is that it pulls you out of the focus on short-term, momentary movements in prices of specific asset class. And instead, it makes you focus on moving the needle on what truly matters – growing your wealth, which ideally comprises various assets in the right proportion, steadily over the long term.

Net worths move a lot slower than a racy small-cap portfolio…but when it does move over time, there is a high impact on your life. And to me, that’s what truly matters. This holds true even though it may not make you the center of attention in investment discussions at a party.

You see, meeting your life goals and covering expenses in the long term depends on your accumulated wealth. It's crucial to focus on increasing this wealth over time. You can do that by always ensuring that your investments are well-diversified across asset classes, in proportions that are best suited for you.

Focusing on growing your overall net worth sensibly is the only way ahead.

If you find this obvious, then perhaps you are already doing this well. But if you are not, then it’s time you got on with this. It will change the way you plan your investments, perhaps, forever.

Rahul Goel is the former CEO of Equitymaster. You can tweet him @rahulgoel477.

You should always consult your personal investment advisor/wealth manager before making any decisions.

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