Backup Your Portfolio, Or You Might Regret It When It Crashes!

My computer just crashed on me. I had finished writing an article only moments earlier and that piece is now lost. The computer is unable to load anymore and the article will have to be redone on my wife’s computer.

But, I am not that worried about any loss of data and the only hassle involved is to get the piece of tech repaired. That’s because I have all my data backed-up regularly and only one article will be a victim of the crash.

Interestingly, we can also backup our portfolio to lower the chance of us suffering multiple sleepless nights when the stock market crashes. Do you regularly backup your portfolio? Here’s what I mean.

Margin of safety

As investors, we have to understand the key difference between the price of a stock and the value of a company. There are times when a stock’s price is not the same as its intrinsic value. Our job as investors is to find bargains (stocks with prices that are lower than their intrinsic values) in the market. If we combine the search for bargains with the concept of a margin of safety, we would be able to invest with peace of mind.

This is because we would have effectively backed-up our portfolio if we invest with a wide margin of safety for every investment that we make. Even if the market crashes,  we can be quite confident that our investments are all trading way below their intrinsic values. So, if their prices were to drop, it would only make them all the more attractive.

Let’s say that we had estimated Singapore Telecommunications Limited (SGX: Z74) to have an intrinsic value of around S$4.00 per share (for illustration purposes only) and that we would choose to invest in it only when there is a margin of safety of 50%. This means that we will only invest in SingTel if its shares are trading at around S$2.00 each.

If we had indeed invested into SingTel at that price and the telco’s stock subsequently collapsed to S$1.00 during a market crash, we should not be panicking and having sleepless nights. This is because we have “backed-up” our portfolio by giving it a sufficient margin of safety before making an investment.

Sticking with SingTel, it might in fact be the perfect time for us to increase our investment in the company since we have estimated an intrinsic value of around S$4.00 per share. If SingTel was to trade at S$1.00, we are, in effect, given a chance to invest into the company at 25% of its real worth.

So the next time you decide to make an investment, should you consider “backing it up” too?

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim do not own shares in any companies mentioned above.