Most of us would have been experiencing negative returns in their portfolio at this time. This article will discuss what we can do for these negative returns. The article will try to answer questions like – Can I avoid negative returns? How can I improve the returns?
This article also discusses what would have gone wrong in the current portfolio. Is there scope to correct something about this investment? If yes, what can be corrected?
In this article, when I refer to an investment portfolio, then it means the portfolio is of equities (shares) or equity oriented mutual funds or any other equity oriented asset.
Good pain is good and anticipated negative returns too
One of the biggest pain is seeing us lose our money, but so is the ‘body pain’ when you start some kind of ‘workout’ or ‘exercise’.
Throughout this article, we shall use the analogy of ‘workout’ for keeping ‘healthy and fit’. This analogy will help us understand more about investing mechanisms.
Body Ache Vs Negative Returns
When you newly start a workout, I am sure you understand that it takes some time to turn you ‘fit. There is some time involved in the process. During the initial days you have, sometimes unbearable, body pain. But all of us understand that this pain is good. It will reap fruits after bearing this pain for some period.
Similarly, an investment portfolio needs some time for it to start reaping the fruits of good returns. Till that time is over, you may have to go through the pain of negative returns. Why wouldn’t you consider the pain from negative returns as ‘good pain’ as in case of workouts?
Message: There will be pain of negative returns (provided you have a quality portfolio) at some point in time of equity investing. This is a good pain.
Joint dislocation vs Losses
You all would agree that in case the workout is not in a proper way, you may incur an injury. Hence, most of us hier coach or yoga mentor etc for proper exercise. In case we do it on our own and more importantly, if we do not follow the protocol, the injury can be as severe as, say a joint dislocation. But do we not take proper care not to face a major injury?
When we see negative returns in an investment portfolio, the losses in that investment portfolio are NOTIONAL unless they are booked. Negative returns are converted into losses only when they are realized. Should we not take proper care and not end up booking permanent losses during such fall?
Message: Negative returns are notional. Do not convert them into losses (unless it is absolutely essential)
Repeatedly Changing Workouts vs Changing the Investments
Recollect those acquaintances who have followed any one stream of exercise, say yoga or gym or daily walk. They have not kept on changing their type of exercise. Moreover, they are very consistent with what they are following. Have you experienced that the results are awesome with such people and hence they are enjoying a healthy and happy life.
Now, if you switch from one investment to another during a downturn, you may end up gaining nothing. As you would book losses in first investment, and second investment still demand you the prerequisite waiting period. There is an expectation that you should wait in an investment portfolio for a minimum specific period for it to stabilize. (This minimum specific period depends upon how aggressive the portfolio is)
Message: Be consistent with your portfolio for the minimum expected period.
Building Body vs Building Wealth
You decide upon what type of workout to be adopted depending upon your end objective. One among you who wishes to build muscles will certainly go to a gym and will do the heavy workouts. The one who wishes to have a flexible body with great health would probably prefer yoga. Someone else who wants to have a healthy heart may adopt a daily walk.
Similarly, when you begin your investments, the objective of your investment must be clear. In case you wish your portfolio to grow aggressively, your portfolio will have more small and mid caps (stocks or mutual funds) and you will have to hold the portfolio for a comparatively longer term. In case you wish to have a portfolio with lower volatility, you may have to go for conservative funds of Mutual Funds.
Message: Decide the end objective, period available, risk you wish to take before finalizing the investment.
Daily Diet vs Recurring Investment
Your diet again depends upon the end objective of your workout plan. A yoga geek may prefer a natural and light diet. While a muscle builder may prefer a diet heavy in calories. The diet is required to be complementary to your workout. You should not get distracted by attractions of junk food etc.
Your ongoing investments are equally important as that of your initial investment. In case you have built an aggressive investment and wish to let it grow for long term, you must adopt a similar SIP plan. You should not get distracted by the alluring stock bets which can destroy your wealth.
Message: Your ongoing investments should stick to your original investment objective.
Happiness due to Good Health vs Freedom due to Great Wealth
Finally, what you get by doing everything as mentioned above is good health. As Buddha says “To keep body in good health is a duty……otherwise we shall not be able to keep our mind strong and clear”
And as Suze Orman says “A big part of financial freedom is having your heart and mind free from worry about the what-ifs of life.”
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