Unless you are
living under a rock or you became a rock, you would know that tech stocks –
especially shares of Ark Invest, which were once darlings of Wall Street – are
having a meltdown. In my view, the current sell down is attributed to plenty of
risky investing behavior in the past few months. These include speculating meme
stocks, punting penny shares, and investing into the SPAC mania with no
fundamentals; these were further fuelled by the rise of many new trading
platforms with zero commission fees.
Truth to be told, my growth portfolio was not spared either. Instead of this month’s usual stock analysis, I will be sharing my strategy on what I am doing in these turbulent times.
Invest in FAANG
I would buy into FAANG (Facebook, Amazon, Apple, Netflix and Google) stocks to benefit from the stock market recovery earlier.
The Nasdaq composite is weighted by market capitalization like S&P 500, meaning that companies with large market capitalization will have the most significant impact on the overall index. Here is the list of the top 20 largest market cap tech stocks – it occupies 1/3 of the Nasdaq index.
The direction of the stock market is mostly dependent on the movement of the stock index, which is driven by the ups and downs of the large cap companies. Hence, big cap companies will be at the forefront in stock market recovery while smaller cap companies take the backseat.
the prospects of rising interest rates came true this year, then the large cap
companies would be less affected since they have good earnings and generate
huge amounts of FCF (Free Cash Flow) on a GAAP (Generally Accepted Accounting
Principles) basis; comparably, smaller cap companies with high operating
expenses relative to gross profit (Teladoc, Open-door, Fastly) will be worse
Therefore, holding on to tech titans like Apple or Amazon shares in your portfolio could counter some of the pain of the stock losses and ride out the volatility.
Put things into
perspective and do not panic sell
In 2018, I first dipped my toes into the US market by purchasing 10 shares of Shopify at USD163. A few weeks later, the shares sank to USD 120, a loss of 26% due to the lackluster earnings report. To rub salt into the wound, one analyst predicted that Shopify is only worth USD60 due to its high price-to-sales ratio.The stock decline made me feel jittery, but being a long-term investor who knows their time horizon, I decided to hold on to my shares.
Fast forward a
few years later, the miniscule drop is so insignificant compared to the gains I
have made to date. My only regret is not buying more when it dipped. The
lesson? Time in the market is more important than timing the market.
it would not have mattered whether I bought Shopify at 5% lower or 5% higher. Back then, Shopify was also trading at a steep price-to-sales ratio, but I agree that in the words of Warren Buffett, “it is far better to buy a wonderful company at a fair price, rather than a fair company at a wonderful price.”
If I had panicked-sold back then, I would have missed out the opportunity of owning shares of this great SaaS (Software as a Service) company. Similarly, in the current situation, I will continue to “hodl” all my growth shares because their fundamentals are intact and I have conviction in their ability to scale. In fact, the current stock market rout is an opportunity for me to add more shares at a discount.
Sometimes, the best thing to do during a market correction is to do nothing. The Oracle of Omaha also famously said, “The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd nor against the crowd.” Being invested in the equity market for ten years, I have been through ups and downs of the stock market such as times when the US lost its triple AAA bond rating in 2011, the UK voted to leave the EU in 2014 and
the US imposed more tariffs on China in 2019. The lesson I learned is that the
stock market always goes up in the long run. Instead of getting so fixated with
every sensationalized news headline that Wall Street wants every retail
investor to hear, try doing… nothing! Ignore the noise in the stock market.
Take a deep breath, turn off the news, and do not check your stock portfolio.
Experience tells me that selling your shares during the stock market correction is the worst thing that a long-term investor should do unless you are a trader. In my case, I have a nine-year time horizon to achieve my goal of $3.909 million; therefore, in the grand scheme of things, two months of volatility does not matter to me.
If you have thoughts of selling your shares when they tank in hopes of buying them back at a lower price, consider this: you have no way of predicting when the stock market will recover, and simply missing a few best days in the stock market could be disastrous for your portfolio. According to Fidelity, missing the top 10 best days in the stock market could affect your overall return by half. Usually, the stock market performs best right after a correction.
|S&P 500 index fund from 1980 to 2018
Look at the chart below. The S&P 500 index plunged 9% in a single day over news that the Federal Reserve would begin Quantitative Easing. Just a day later, it went back up by 9%. If you had cut your losses during the drop, you would have missed out 9% in a single day and all the big gains in the following month.
|S&P 500 Index
With that being
said, it is as important to know the reason for owning your stocks as it is to
have a portfolio strategy. Investing should be like a game of chess, where you
have a clear investing strategy, and not roulette, where you buy stocks which
are en vogue at that point and expect them to rise sharply in a short period of
time. Take a good look at your current portfolio, and if you don’t know the
reasons why you purchased them in the first place, it is time to read up or do
research on the companies you own. If you finally realized that the stocks do
not match your risk profile, take it as a lesson learnt, bite the bullet and
move on. To err is human, after all.
I remember a Facebook user just began his investing journey and was looking for a mentor. Another user responded, “you don’t need one; thestock market is your mentor.” Although it was funny, there was some truth in it, too. Only once you get your hands dirty and truly participate in the stock market long enough, you will understand that the stock market is like a roller coaster and volatility is part of the ride.
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How did your stock portfolio perform
this month? Are you affected by the tech stocks recent volatility?