We have had several meetups with subscribers in the last 2 years. One of the most common question is ‘what do you think about the market’ ?
It is important to unpack this question and on why people ask this question
Most people want to know if the stock market is overvalued (so that they can sell) or undervalued (so that they buy). The other reason is that they are concerned the market will crash and lead to losses
The above concerns are valid, but this is the wrong question to ask. If you are a bottom up investor, market levels make no difference. If the companies you hold are undervalued, then you should buy or hold irrespective of what happens to the market in the short term
The other concern is losing money at the portfolio level when the market crashes. This will happen even if your stocks are undervalued. The first change in mindset is to get comfortable with losing at the portfolio level when the market drops. There is no way to get around it and this is the price we pay to make above average returns
If you get upset when your net worth drops substantially during market corrections, review the asset allocation of your portfolio. Let’s say 80% of your portfolio is allocated to equities. If your portfolio drops by 25%, will you get upset and sell your stocks in a panic ? If yes then reduce the equity allocation to the point where you will not lose sleep over it
The right question to ask is not what will happen to the market in the near term. Instead, figure out the asset allocation where you will not lose sleep if the market drops. This action is under your control where as no one knows what will happen to market.
