Drawdowns in the Market Are a Great Reality Check for a Portfolio

I have been increasingly bearish on the market recently, especially after writing the article “Time to Hedge Market Risk?” about a month ago. If I’m being honest, I don’t feel great about the current market action.

With that said, what should we do—sell everything and run?

I’m not doing that, and I think it’s a fool’s errand to do so. For all I know, the market might melt up from here as some are predicting or just continue muddling along as it has for a long time now.

Instead, I try to use these large drawdowns as a reality check for my portfolio to see if I am invested in companies that I am prepared to hold through turbulent times. In my case, that means whether I believe strongly in what the companies I am invested in are doing and whether I trust their management teams well enough.

I like to think about my portfolio as 80% core investments that I have strong conviction in and intend to hold for a long time, and then 20% in liquidity, speculations, and sometimes hedges. Most of the companies in the 80% core portfolio were once small positions, while I was learning more and gaining conviction.

I am not interested in selling the companies in my core portfolio, even if there is a recession ahead, because my entry price is good and I think they represent great value.

The only reasons why I would sell these are if I realize I made a mistake or I believe my original thesis has played out and there isn’t much upside left. Sure, I might trim slightly if something becomes way ahead of itself, but for the most part, I try not to touch this part of my portfolio.

An example here would be Dundee Corporation (TSX: DC-A). I invested in this company a couple of years ago, but it was a very small position at the time. I then substantially increased my position at the lows early this year.

I consider Dundee Corporation to have a great, honest management team that has been doing everything right in turning around the business. They are building a great financing business in the mining space, and the stock is still really cheap.

Why would I sell?

I got in at a great price, I believe in what the company is doing, and I trust the management team to execute and effectively allocate capital. Therefore, I don’t see any reason to sell, whatever happens in the market, and instead intend to hold this position for a long time.

However, looking at the more speculative part of the portfolio during the most recent drawdowns, I was a bit uneasy about some positions. I just don’t have the conviction yet in what they are doing or don’t fully trust the management teams yet. For some of those, I decided to sell, because I’d rather have cash to invest than a company that I’m lukewarm about if there are tough times ahead.

Again, I’m not trying to predict anything here, and I like to invest in and hold the companies I own for a long time. But as I mentioned above, I have a varying degree of conviction in the companies I am invested in, and some of them don’t deserve that long-term, hold-through-whatever-happens position yet.

So, I am using these drawdowns in the market as a reality check for my smaller, speculative portfolio. I have been going through each company and asking myself: Is this something I have strong conviction in? If not, I am inclined to sell.

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Disclaimer: This article is for informational purposes only and does not constitute investing advice. Please consult with a qualified financial advisor before making any investment decisions.