An equity market is an amusing place. Different people react differently to losses and gains.
There could be two different perspectives on the same investment.
Let’s take an example of a mutual fund – Scheme A. Let’s consider two investors with not much experience & skills in investing – Raju and Gopal bought Scheme A on the same day and for the same amount.
Scheme A has incurred a loss of 20% when all other schemes are positive. Raju and Gopal think differently about Scheme A:
– Raju thinks since the scheme is performing poorly when all others are doing good, let’s sell it off and reallocate the investments to good-performing funds
– Gopal feels that a 20% correction gives an opportunity to buy more in Scheme A since it is now cheaper than the first buying price
Who do you think is correct in their assessment?
Either could be correct with the outcome of the actions they will take but both are wrong regarding the reason for taking that action.
One should never buy or sell an investment based on the initial purchase price. The buying or selling should entirely be based on
1. Whether the current price is less or more than the intrinsic/fair value of the investment
2. The weight of the investment in the overall portfolio, and
3. The conviction with the investment
You will always be aware of the price of an investment but that is of no help unless you know how to evaluate intrinsic/fair value and astutely design a portfolio allocation. Portfolio management requires skills that can be brought by a seasoned investor, professional investment advisor, or analyst.
Another important point is to evaluate investment in the context of the entire portfolio. Each investment has a role to play in the portfolio which could be diversification, tactical allocation, negative correlation, etc. and that should not be forgotten while managing a portfolio.
In a bull market, every rock looks shiny but only in a bear market do we discover real diamonds.
Originally posted on LinkedIn: www.linkedin.com/sumitduseja
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