Letting go is hard to do...

Winning and losing are part of the investment game
The recent market correction in August 2007 has hit my portfolio in terms of paper losses. I did not sell at the lowest of the lows when the STI tanked significantly. However, the STI has not recovered fully from that hit and I decided now that the STI was regaining strength, to sell into strength and get out of some of my underperforming stocks.

One of the fundamental principles of investing is putting in money that you can afford to lose. This principle is there for a reason. Firstly, if you are willing to take loss and exit out of under-performing shares, you can redeploy your capital to other investments. Secondly, you are also able to hold if the market turns drastically against you like it did in August. I count my blessings that I managed to hold on beyond August as when the STI was at its lowest point in the correction, that was the worst time to sell. If I had done that, my paper losses would have been in the 5 digit figure!

However, by now, I am fortunate enough to sell off underperforming shares which I bought at somewhat toppish levels. This allowed me to mitigate the impact of the losses. I still had realised losses to the tune of low 4 digits but it was still a painful lesson to learn from Mr. Market.

Why not hold forever?
This is a tempting strategy for those who have holding power. The reason I decided to pare down my portfolio by letting go of the underperformers was to unlock my investment capital to be re-deployed in safer instruments as at one stage my portfolio was almost 85% in equities and 15% in time deposits, savings and treasury bills. This was a highly overweight in equities and I felt that given the recent and likely continued volatility, a more comfortable exposure to the equity (shares) should be closer to 70%.

In addition, some of the counters that I bought looked to be real laggards and the dividend yields were quite low for the risk of further capital loss, hence I decided to prune this and now my porfolio is back on track in the green.

What did I learn from this experience?
Cutting losses is always painful because it means acknowledging that one did not buy at a sustainable price. The greed of wanting to recoup the losses by holding and hoping for the market to rally again is also strong and to overcome it I had to eat humble pie and recognise that those were mistakes. :) However, the positive thing about the experience was that I did use proceeds from my sales of those underperforming shares to buy shares that were undervalued during the correction. Hence, I got into a few blue chips that have helped lift my portfolio back to where it should be, showing modest growth that is on track to yield me a return of at least 2 x the highest prevailing fixed deposit returns.

Going forward
On hindsight, the buying and holding of quality bluechips for the long-term is still the best approach I should be taking. However, the trick is to go in at the price which gives you a higher chance of capital appreciation as compared to chasing a share at its day-highs.

I also need to guard against the gambling mentality which manifests itself strongly during periods of extreme volatility in the equity markets since that is the time where the large price movements intra-day make for good trading opportunities.

I hope that the August 2007 correction did not impact you too much and wish all of you to be healthy, well and to prosper!