Oct 21, 2013,17.01 IST
Here's how to treat non-performing investments
‘I am following all key models suggested by the advisors, specialists while investing. Still I haven’t seen the growth in my portfolio as it should be. There are some investments which are not performing. What to do with them?’.
These confusing thoughts often occur in investors mind. We often forget to get the answers for why a particular product or instrument is not working as favourable as we expect. Read on.
Never sell your stocks or mutual funds if not performing in the short term.
Do you sell your stocks or mutual funds in the short term for non-performance? Stop doing it now. Stock market normally performs like a circle, the things that goes down will come up at one time.
It is a good idea to wait for the market to recover and then sell it when it is hot. Do not sell your non performing stocks or mutual funds when the market is creating a panicky situation by crashing for temporary reasons.
Do you average out a stock or mutual fund which is not performing because its fundamentals have become weak?
No, never do this. At times investors get attached to the investment when it makes loss. They will not sell. They think that, they can make some more additional investments and average out the price, so that when the price goes up, they will be able to recover the losses faster.
This averaging out strategy holds well, as long as the stock or mutual fund is fundamentally strong. If the stock or the mutual fund becomes fundamentally weak, the chances of price recovery are very remote.
Therefore averaging our a non-performing stock or mutual fund will make you more losses for yourself. So you need to check before averaging out, the stock is fundamentally strong or weak.
Do not carry your non performing stocks for a longer duration.
Booking loss is better than carrying loss. I agree that it is not easy to recognize the non performing stocks as it degrade your decision making skill. My advice is to be realistic here. Never let your pride or fear to dominate the decisions.
Accept that your decision has become wrong. Accepting the wrong, shows that you are emotionally strong. Being emotionally strong is a required quality for any successful investor.
After accepting the wrong investment decision, take courageously the next step to sell the stock or mutual fund and book loss. Cutting losses is very important to be profitable in stocks or mutual funds.
Instead of waiting in the non-performing fund or stock for recovery, if you book loss and reinvest in some other better performing investments, the recovery will be faster.
How often do you monitor your portfolio?
You must set up a pattern or period to monitor the performance of each product that you have purchased. Continuous monitoring and periodic rebalancing of your portfolio will help a lot to grow your wealth.
How often do you make changes in your portfolio?
Have you been tossing off the products very often? Selling everything when the value goes down and buying more when the market is doing fine? If you are doing it very often, the chance of you owning lot of non performing products is not surprising. Look at the way the market works, analyse well and then take any decision.
The sad truth is that there is no defined strategy to forecast how the stocks will perform at any given point of time.
However, you can minimize the loss by following the simple tips given below.
• Research well before investing on any particular product
• Monitor the market performance keenly before taking important decisions
• Time it well whether to hold or sell the product
• Choose the appropriate method to calculate your finances
• Do not retain the loss making products for a longer time
• Time it well to monitor your portfolio
• Do not make changes to your portfolio very often, fix the period and do it
What should be the next step you must do with the non-performing instruments?
1) List down the non-performing instruments you have right now
2) Check the current market value and the history
3) If the value has gone down drastically, list out the reasons
4) If the reason is a temporary one, you may use averaging cost method to forecast how the product will work in the near future
5) If you find the reason as permanent one, sell the instrument. Even if you are facing a loss by selling it now, it will help to reduce the loss you may incur by holding it for more period
Least, but the most important thing you should do is to fix a period now to monitor and re-balance your portfolio.
The author is Ramalingam K, CFP CM is the Chief Financial Planner at holisticinvestment.in, a leading Financial Planning and Wealth Management company.
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