People often come to me and say, oh my gosh, my investments have lost money. But nobody can tell me how they lost the money. It’s frustrating because the people handling their money can’t tell them how it’s happened.

It should be easy to tell an investor why their portfolio has gone down. Your portfolio going down doesn’t mean that you’ve lost money; it just means that it’s gone down.

What should you do if your investments are depreciating?

It depends.

You need to think about the quality of your portfolio: how diversified it is and where your money and risk resides.

Here are some questions that you might want to ask yourself when you look at your portfolio and see that it’s gone down a little bit in terms of its dollar value.

Are you invested in bonds?

The first question is, are you invested in bonds?

If you are, what kind of bonds are they? Remember, bonds are debt instruments that pay a fixed income. Therefore, they should be relatively safe investments.

But if the bonds are corporate bonds, not government bonds, they are much riskier.

People underestimate how risky corporate bonds can be. They can go down and swing quite largely. So, I usually encourage people to be wary of corporate bonds.

The other thing I’ve spoken about before is diversifying your risk to maximise your investments.

We usually diversify risk between asset classes, i.e. bonds versus stocks. Well, I say, let’s think about where those bonds are because you can diversify your bonds as well.

Do you only own Australian government bonds? You don’t need to. In fact, you probably shouldn’t. There are other markets out there.

So, look at the entire portfolio; it could be that there’s a credit risk issue over the Australian government, or maybe our AAA rating is at risk.

If Australia’s AAA rating is at risk, your safe government bonds will likely take a little bit of a hit. So, that could be a reason.

But again, bonds do tend to be safer.

Are you invested in stocks?

With stocks, there is also a series of questions you need to ask.

First, are you invested in single stocks or an index of stocks?

In other words, have you made a bet on a single company, or have you made a bet on an entire sector of the economy?

The reality is, if you invest in single stocks, you take a much greater risk.

The average life of a stock or a company is less than 18 years (it used to be 50 years). Thus, roughly ¾ of all the 500 stocks on the S&P 500 will have disappeared before the end of this decade.

If you only invested in one of those 500 stocks, you are in trouble. If you invested in the S&P 500, however, you can sleep soundly.

Why? Because the index of the S&P 500 never disappears.

Companies that go bankrupt drop out and are replaced by other stocks that enter the S&P 500.

Here’s a comparison.

What if you love cruises, so you heavily invested in your favourite company—Carnival Cruises?

With COVID, cruise companies were hit incredibly hard. If you invested in Carnival Cruises, you would have watched that company’s revenue decline by 70% in 2020 and stock performance suffer, and had no other stocks to mitigate that.

On the other side, some companies last longer and prosper, like Apple. But others might fly high then disappear. Nokia is a good counterexample of that.

When you think about stocks, you do not influence the company. You can’t tell the CFO he needs to pull his socks up and have a tighter rein on his spending.

Because of that, people often say that when you invest in single stocks, you’ve made a bet.

It could be a good bet, but perhaps if your stock is down, you’ve made a bad bet. So, take a serious look at your single stock investments.

Are you invested in a fund?

Now, you may also have invested in a fund, and the fund has gone down.

Then the next question is, well, what does the fund invest in?

I had a friend whose portfolio was down significantly. He couldn’t find out why. His financial advisor couldn’t tell him, so I took a deep dive into his portfolio and found that he was a heavy investor in condoms.

I don’t know whether that was a good or a bad “bet”, but it wasn’t a decision on his behalf to be invested in condoms. There didn’t seem to be any real rationale for it.

So, digging deep, you’ll find many interesting things, and some of those things you may be surprised to learn you’re investing in, and it may lead you to question your choice in fund.

Every evening you hear on the news, something happened, and stocks are affected. Nobody wants to say the DOW went down, but we don’t know why. However, that’s probably a more honest answer.

What drives the price of a stock?

Both intrinsic and extrinsic factors drive the price of a stock.

Intrinsic is a quality of the company. Is the company doing well? Have they made suitable investments? Is the CFO good? Is the CEO good? Does the company have great products? Do people want to buy from this company?

Then there are extrinsic factors, which can be quite critical.

Often, you’ll get external shocks. Perhaps a war breaks out. BREXIT in the UK and Trump being voted in are all external factors that affect the value of stocks. Positions move up and down based on these.

But if your portfolio is down and there appears to be no external news, it’s probably internal. Perhaps your investment manager had invested in Nokia just before the iPhone came out, for example. That wouldn’t be good.

Is your portfolio moving because of external factors, or is it internal?

If the news affecting your portfolio is external, it’s usually a sign to keep calm.

You can do some appropriate research, which I always suggest you do from time to time anyway, to evaluate whether the external factor will pass.

A great example of this is the most significant stock market crash in history. In October 1987, the DOW lost 22.6% of its value, which in one day is utterly staggering. But it was back to its old position very quickly.

In other words, sitting back, relaxing, maybe doing a bit of research, but just being patient, you may find that your portfolio will return to its more stable rate.

Ultimately, if you’ve invested in a broad spectrum of stocks and bonds, and you’re diversified in your risk, and you’ve had people take a good hard look at the way you’ve invested, over the long term, you will win.

I wouldn’t be pulling money out, certainly not if there’s a massive market downturn. But a market downturn can be a great opportunity.

I often tell people to keep cash on the side just to take advantage of these externalities.

As Warren Buffet says, be greedy when everyone is fearful, and be fearful when everybody is greedy.

Being counter to the flow is always good, and that’s why I encourage people to keep cash on hand, keep calm, and have a good think about how they’ve invested.