Q: The bear market has been causing me some serious heartburn. Not only is my account losing money, but I am down more than the S&P 500, the NASDAQ and every other index I can think of. Given my losses, maybe I should just throw in the towel and buy a mutual fund. Your thoughts?
A: Based on your question, it sounds like you think mutual funds are a second-rate investment solution. Personally, I love mutual funds and exchange-traded funds. They provide instant diversification and they make it easy to move large amounts of money in my portfolio very quickly. Plus, they are cheap—especially if you buy passively-managed institutional funds like Vanguard’s Total Stock Market Index fund. There is nothing second-rate about mutual funds and exchange-traded funds
Regarding your portfolio’s performance, I point you to a column I wrote last year titled “Confessions of a Bull Market Genius.” The column describes how bull markets can fool people into thinking they know more than they really do. Making money in a bull market requires little skill and discipline. However, when the bull market ends, the ensuing bear market quickly reveals who is truly a skilled investor and who is simply a bull market genius.
As you think about your performance, I suggest you ask yourself some questions. For example, what kind of homework did you do before you bought your stocks? Properly researching a stock involves a lot more than looking to see how it has performed compared to other stocks. It is also more than reading write ups on investing websites like Motley Fool or Seeking Alpha. When you analyze a stock, you need to dig into its financial statements to see how it makes money. You need to ask questions, such as: What are its major lines of business? Which lines are profitable and which are not? Is the business growing? How much leverage does it have? How well does it innovate? Who are its main competitors and how well does it compete? Does this company have a unique advantage or edge relative to its competition? Do its profits justify the price of the stock? Are there reasons beyond profitability to own this company? Is this a company I want to own or is it just a stock I want to buy? As a reference point, Warren Buffett buys companies he wants to own, not stocks he wants to buy. There can be a very big difference.
If you did not properly do your homework before, you need to do it now so you can decide whether you should ride your stocks through the bear market. If you don’t have the appetite to do the analysis, then do yourself a favor and sell your stocks and buy a fund.
You should also take a look at your asset allocation. Determining how much of your portfolio should be invested in stocks versus bonds versus cash is one of the most important investment decisions you will make. A strong, resilient portfolio will usually own a mixture of all three asset classes. The proportions in each will be based on how much volatility you want and the kind of return you need the portfolio to generate. You also need to look at how much money you expect to withdraw from the portfolio in the next few years. Your expected withdrawals help determine how much to put into your bond allocation.
Finally, look carefully at how much money you invest in any one stock. The fact that you are underperforming every benchmark indicates that you probably have a highly concentrated portfolio. As a case in point, as of this writing, the NASDAQ index is down 27.4%. A diversified portfolio of tech stocks would probably be down a similar amount. However, if you had large positions in Nvidia (-46.4%) or Meta Platforms (-51.0%) or Amazon (-31.9%) you would be well below the index.
Whatever you decide to do, I highly encourage you to educate yourself on sound investment principles. Several excellent books have been written on the subject, including Burton Malkiel’s A Random Walk Down Wall Street, and Benjamin Graham’s timeless The Intelligent Investor.
Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have about investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to email@example.com.