MENU

Here’s How To Destroy Your Stock Portfolio

No investor willingly chooses to destroy their own stock portfolio and in the process — their own wealth.

But it is possible that some investors might be taking actions that are detrimental to their own stock portfolio without realising it. And if you are unaware, those moves could cost you. With that mind, I have listed three behaviours that investors should avoid in the stock market.

“Investing” for the short-term

The father of value investing, Benjamin Graham, once said:

“Thousands of people have tried, and the evidence is clear: The more you trade, the less you keep.”

According to LPL Financial, the average holding period of stocks has fallen from eight years in the 1960s to just five days in 2012. That is worrying.

Stocks are not mere pieces of paper to be traded with. What a company’s share price does today, tomorrow, or next week doesn’t always reflect its business performance and is at best, a distraction. What we should do, instead, is to approach the stock market with the right mentality; that is, to view shares as breathing, living businesses.

In a matter of days, businesses cannot do much. It takes time for investments within the company and improvements put in place to bear fruits. Eventually, the market will recognise the improvements and reward shareholders. There are statistics to back this statement: the longer your holding period, the higher your chances of making a profit.

Timing the market

As we enter December, the Straits Time Index (SGX: ^STI) is down almost 14% from its peak in May earlier this year.

When faced with a falling stock market, some investors feel it is better to exit the market and re-enter when stock prices are lower. In theory, that sounds logical — you can avoid losses as the market declines and can buy back the shares when stock prices are lower.

But in reality, market timing is tough. Studies have show that timing the market is futile. In his 1973 investment classic, Random Walk Down Wall Street, Burton G. Malkiel cited a study on market timing:

“An academic study by Professors Richard Woodward and Jess Chua of the University of Calgary shows that holding on to your stocks as long-term investments works better than market timing because your gains from being in stocks during bull markets far outweigh the losses in bear markets. The professors conclude that a market timer would have to make correct decisions 70 percent of the time to outperform a buy-and-hold investor.”

The better approach is to stay invested throughout a market crash and buy the same companies at lower valuations, provided the reasons why you bought them in the first place are intact.

Buying companies with lots of debt

When times are good and the stock market is cheery, investors can fall prey to rising stock prices to the point where they ignore business fundamentals.

As investors, our eyes should always be on the business, rather than the stock price. In particular, we should look out for firms with weak balance sheets and poor cash flow. Such companies may find it challenging to refinance their loans or pay off their loans when an economic crisis hits.

Therefore, we are better off in investing in companies that have strong balance sheets and generate steady amounts of free cash flow year after year.

Worried about the overall state of the market? Do you know the 1 thing you should never do in the stock market? The Motley Fool Singapore’s new e-book lays out a plan to handle market crashes, details the greatest advantage you have as an investor, and looks at decades worth of market data to bring you the smartest insights on investing. You can download the full e-book FREE of charge—Simply click here now to claim your copy

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.