Step #3: Do a Systematic Check of Your Holdings
So, after you’ve taken a deep breath and found out what’s causing the sell-off, it’s time to look at your holdings through Portfolio Grader.
The grades allow you to immediately check the fundamental strength of your positions and if they have what it takes to survive a downturn and what it takes to come back from one. D and F graded stocks should always be sold immediately. These companies simply don’t have the fundamentals or buying pressure to bounce back from temporary dips. In general, these stocks will be the first to fall and the last to recover—not a position you ever want to be in. Good stocks (rated A or B in Portfolio Grader) are like fresh tennis balls—they can’t avoid market sell offs, but they bounce back quickly and with force.
It’s also a good idea to check the beta of your portfolio to see if you can expect your portfolio to swing wider than the market or run in line with it. Beta is a measure of systematic risk, or the sensitivity of a stock to movements of a benchmark (usually the market). A beta of 1 means you can expect the movement of a stock to match the market. So if a stock or portfolio had a beta of 1.10, that means the stock has historically moved higher and lower than the market by 10%. In a similar way, if an asset had a beta of 0.80, then it has historically moved -20% in relation to the market–both up and down.
Knowing what your beta is and if your stocks are working outside of those norms will help you identify problem areas and focus on those stocks. From there, you’ll be ready to buy, sell or hold…
Step #4: Buy, Sell or Hold
This is the time to take your action. You’ve already assessed the situation and have determined if there’s reason to believe a further downward slide will occur or not.
Have confidence in your decision and stick with it. While I’m no fan of taking action for action’s sake, if you decide that a stock should be sold or a buying opportunity has presented itself, you need to act on it.
Step #5: Have a Strategy
Sell-offs will expose weaknesses in your portfolio. Use your knowledge of which stocks were hurt the worst to trim your holdings in one area and increase your exposure in another. The lessons you learn during each boom and decline will make you a better investor and help you reach your financial goals.
I hope that you found this 5-step list helpful and that you will feel confident with the knowledge that you will be prepared for any market volatility that may come your way in the weeks and months to come.
And I can guarantee you that more volatility is on the horizon. Why is that? Because there is always a level of volatility around earnings season, the holidays and summer. Knowing that stocks will rise and fall and being prepared for both situations is part of investing.