Daily dose of stock market learning - 7th December 2022

 

Under-performance in Portfolio

• When market makes new highs, a lot of portfolios become under performers when compared to the benchmark index.

Why is it so?

• According to me, this happens because when markets go up, generally one small portion or the heavyweight pull the major index upwards while the other companies watch like an audience.

• It might not sound true, but what I think is most of us due to the greed of higher & higher returns often neglect the large caps or heavyweights & get attracted towards mid caps & small caps.

• Hence, when these large caps go up taking the index higher, our portfolio filled with small caps & mid caps underperform as money flows out of them & come in the heavyweights.

But how does it affect?

• Being humans, we all have one unique thing within us which separates us from the rest, it's called emotions.

• When markets keep making new highs, when popular names keep going up with momentum but our portfolio keep underperforming, it brings in frustration for the investor. This frustration then turns into FOMO which is the recipe for disaster in the stock markets.

• Some allow their emotions to take the driving seat & start re-structuring their portfolios without any second though in the greed of short term gains while completely neglecting the risk or break of compounding in the longer run.

Then how to avoid this?

• Some might hate this, but the cure is just do nothing. If you know that you have picked your stocks on your own with proper research & back testing, be patient, stick with your work, keep doing your research & even add to your high conviction stocks.

• Separate yourself from the noise. Don't be distracted by those new channels or social media posts of some Xyz company doubling within a month. Remember, everything is temporary in the stock markets. Your time will come, we just have to survive till then.

Pro tip :- During periods of underperformance, try to find out why is your portfolio underperforming. Did you do any mistake in asset allocation? Did you miss anything during your research? It can be any kind of mistake. Note that down in your journal. This would help you avoid this mistake next time & hence improve chances of outperformance!