In one day (April 20th 2022), Netflix lost 35% of its share value but considering that the stock had already been through a lot this year, this dip should not have come as a surprise. Between January 2022 and now, Netflix has lost about 73% of its share value.
This means that if you had N1,000,000 (let’s say that’s your entire savings) in Netflix stock, you’ve lost over 50% of your hard-earned money!.
Of course, stocks are volatile and unpredictable and the Netflix stock can suddenly gain over 100% in value tomorrow, but what if it doesn’t? What if it never rises again? This has happened with many stocks in the past and it is for cases such as that that I’ve written this.
Lessons from #BitcoinCrash and the danger of over concentrating your portfolio
#BitcoinCrash is currently trending and not for pleasant reasons.
In the past 24 hours, I’ve read tweet after tweet of people who have lost a tonne of money to the cryptocurrency dip.
Truth is, trading stocks directly can be brutal, and that’s the same for any asset in the volatile market. It’s not for the fainthearted.
This is why having a well-balanced portfolio or mutual fund remains the best investment strategy for busy people.
Imagine if your N1,000,000 was split across 20 stocks in an equity mutual fund, and you just had N100,000 in Netflix which lost 73%, while the other 19 stocks gave you an average return of 5%. Your loss would be -2%, and not -73% if you had invested in Netflix alone!
Like parents who have to watch their toddler every 24/7 to ensure they don’t break anything and hurt themselves, you don’t need to spend each day worrying about one asset or the other if you’re not a fund manager.
Create a balanced portfolio
Balancing your portfolio is one of the most important things to do as an investor.
To do that, you first need to take a risk assessment test. Your result will show what type of investor you are and will give you an idea of how to separate your portfolio into low, medium and high-risk investments.
If you’re a low-risk investor, a portfolio that looks like this might be ideal – 60% in conservative assets, 20% in moderate assets and 20% in growth/aggressive assets.
Dividing your assets into these three risk buckets means you’ve “balanced” your portfolio and you can withstand the shock of one stock or asset going bad. But that’s not all…
Periodically rebalance your portfolio
Balancing your portfolio is the first step, but you then need to ensure you rebalance at least once a year to make room for the changes that happen in your portfolio.
Rebalancing helps you ensure that your portfolio stays true to the ratios and objectives you originally set. If you leave your portfolio for long without rebalancing, it is likely that the assets in it will change in value.
Going back to the previous ratio shared – 60% in conservative assets, 20% in moderate assets and 20% in growth/aggressive assets. Due to the changes that each asset class experiences, the 60% in low risk might become 20%, the 20% in medium-risk can become 30% while the 20% in high-risk assets can grow to become a whopping 50% of your total portfolio.
It can be enticing to leave your portfolio like this, but remember – you must always measure your decisions based on your original investment ratios and objectives. If something crazy happens in the volatile market today, that leaves you with the possibility of losing 50% of your total portfolio.
To rebalance, you should sell 30% of the high-risk investment and 10% of the medium-risk investment and use the funds to top up your low-risk assets so that it goes back to the original 60% in low-risk assets, 20% in medium-risk assets and 20% in volatile assets.
Once that’s done, your portfolio is rebalanced.
How often should you rebalance your portfolio?
It is advisable you review your portfolio and rebalance at least once a year or when a major event happens in your life that will alter your spending style.
For example, If you have a child now who you need to provide for, or you are going to do an MBA in less than a year, then you might want to increase allocation to low-risk and more liquid investments.
Essentially, when it comes to portfolio rebalancing, there is no one-size-fits-all. The frequency can change depending on your overall investment style.
Many investors have lost a substantial part of their portfolio this year (just search for #BitcoinCrash on Twitter to see some reactions), but many are still enjoying stability. The key to enjoying stability is to have a balanced portfolio and mutual funds are a great place to start.
Mutual funds are investment arrangements that pool funds from various investors. This pool of funds is then invested in a mix of carefully selected instruments.
For example, a mutual fund can invest your money in a basket of stocks rather than in a singular stock. Such that even when one stock is declining in price, other stocks in the mix can still give you a stable and steady return.
Ready to create a balanced portfolio? Then get started here.