How to prepare for market routs

The key to taking advantage of high volatility is remaining unemotional, which requires having a plan well ahead of time. It’s natural that in times of panic you’ll gravitate to the stocks you already own. Initially, you’ll likely play defence by reassessing the risks in your portfolio. As broad market sell-offs don’t normally impact the long-term prospects of a business, you’ll then hopefully shift gears into offense, asking whether you should be buying more shares in the companies you understand best, run by management teams that you know and trust. Staying level-headed and calmly working through this process will keep you ahead of the vast majority of investors, but the problem is that there are likely to be a host of better opportunities outside your portfolio. Read on below or watch the video: <a href="" target="_blank" data-event-type="click" data-event="link_click">(VIEW LINK)</a>
Nathan Bell


As analysing a new business can be time-consuming, your best asset in times of panic is a Watchlist of stocks with updated valuations. The key is performing your research and valuation estimates ahead of time when your emotions are unbiased by turbulent markets and nasty headlines, which can make you think short-term.

A Watchlist will reduce your natural bias to the stocks already in your portfolio. And herein lies the trick to mastering volatility. As markets get cheaper, some stocks will be falling much further than others. To make sure you’ve got the most prospective portfolio at all times, you’ll need to crystallise losses by selling cheap stocks in your portfolio for even cheaper stocks you don’t necessarily already own.

As it’s impossible to know how far the market is going to fall, your aim is to keep increasing the potential returns of your portfolio for a similar or lower amount of risk, which is hard to do when you don’t have a Watchlist and are wedded to what you already own.

In the wonderful book Predictably Irrational, author Dan Ariely showed that once someone owned a Duke basketball ticket, they valued it 14x more just because they owned it. Investors do the same with stocks, so if you can remain emotionally detached from your stocks and use your Watchlist to make sure your portfolio is always as prospective as it can be, you’ll look forward to the opportunities created by volatility whatever the cause. 

Nathan Bell
Nathan Bell
Portfolio Manager

Nathan has over 20 years' investment experience. Before joining Peters MacGregor, he worked for 9 years at Intelligent Investor, including 4 years as a Portfolio Manager. Nathan is a CFA charterholder

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