How to prepare for market routs
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.