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10 Ways to Deal With a Portfolio Disaster

Ever spent countless of hours and months doing intensive research and analysis to construct an optimal portfolio?  Until such time when a “crisis” hits and the portfolio turns into a disaster … …

We look at 10 ways to deal with a portfolio disaster:

No. 1 Identify the Problem

Foreign Exchange Charts
Foreign Exchange Charts

Your portfolio has no problem, the market has.  Running a series of portfolio simulation on risks, expected volatility and projected returns, provides you with few insights on your portfolio since most portfolios constructed would have a high correlation to Beta (market / benchmark).

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If your portfolio is constructed with an over-concentration on a few investments, the bets had clearly gone wrong, this time.  But what if you were right?


No. 2 Portfolio Over-Concentration

At the beginning, you had spotted clear investment trends and economic trends.  You overweight the portfolio allocation on those sectors and out of nowhere, the portfolio is down 20% which is quite a disaster. (If you had overweight cash for a long time, you would likely be out of job as an Investment Advisor or Portfolio Manager unless you are a Money Market Manager)

Do you really like a particular stock? Put 10% or so of your portfolio on it. Make the idea count. Good investment ideas should not be diversified away into meaningless oblivion

~ Bill Gross

Now that overweight comes into question.  Doubts surface on the original strategy.  Wealth Managers, Portfolio Managers and Clients start to have second thoughts on their original convictions and begin to de-risk the portfolio.  By lowering the portfolio risks, the expected returns will decrease dramatically as the original capital had already been reduced.

What gets you there, will get you out.  Enhancing the original conviction might be the perfect antidote.


No. 3 You Thought You Had the Perfect Portfolio


There is one risk you can’t diversify – systemic risk.  And this risk is ever-increasing as market players begin to take more reckless and bigger bets.  All for the same purpose like yourself, to generate outperformance, alpha and positive returns.

So your portfolio which would in normal circumstance, be the star portfolio, now ended up in a disaster.  Comprehensive risk management or optimal diversification, are now academic theories as market pricing dries up.

There is nothing you can do except to wait out and for market pricing, volume and players to return.


No. 4 Do Nothing

Portfolio Projection
Portfolio Projection

One of the best way to deal with a portfolio disaster is to do nothing.  If you cut loss and a rebound follows in the next 6 months means you are chasing not only the lost recovery, but also the losses on the original capital.

But what if it continues to decline?  Or some bonds or equities may be on the verge of default or bankruptcy?  Since you never know, doing nothing on the portfolio might be your next best move.


No. 5 Taking Extraordinary Measures

Unfortunately, not all portfolio disasters can be a waiting game.  Some portfolios are leveraged, geared or face margin calls.  Changes in credit policies could reduce margin ratio or reduce lending value on pledged assets, giving more pressure to take immediate actions.

There is only one side of the market and it is not the bull side or the bear side, but the right side

~ Jesse Livermore

This is perhaps some of the most trying times for Margin Trading Team, Traders, Hedge Fund Managers and Wealth Managers who have leveraged portfolio.

Possible Actions:

  • Delay and hope recovery comes in a few days
  • Liquidate worst-performing assets
  • Liquidate best-performing assets
  • Liquidate a fraction of portfolio
  • Increase Capital
  • Liquidate Everything
  • Switch Assets to Improve Capital Efficiency
  • Overhaul of Portfolio
  • Just wait out


No. 6 Clients Relationship Building

International Banker
International Banker

Since there is not much you can go but to wait for the portfolio to recover and market sentiments to improve, the only plausible thing you can do is to build and enhance client relationships.

Before you can do that, you should be ready for a long Q&A on why it happen, how it happen, how could this escape your experts … …

And thereafter, you can spend time softening the blow, knowing that everyone is in the same bad shape (hopefully).


No. 7 Await a Recovery

The Stock Market is designed to transfer money from the Active to the Patient

~ Warren Buffett

Markets will make a recovery, sooner or later, in modern economic history. While you could continue to analyse what went wrong and what could you do next, millions of analysts and investment experts are doing the same as you.


No. 8 Dealing with Lower Potential Fees

After a few weeks or months, if the portfolio doesn’t go too well, it means you are in for a sustaining period of lower fee income.

Whether you are a Fund Manager, Hedge Fund Manager, Wealth Manager or Investment Advisor, the 20% decline in portfolio affects a major part of your fees.  Add to a potential outflow of assets and capital means your portfolio infrastructure (cost to income ratio) might not be sustainable.


No. 9 Look for New Businesses

Private Banking Event
Private Banking Event

Now that your portfolio is in a disaster, no look further but to new businesses.  Your diligence and care for the numbers on the computer screen will bear no correlation to the next 6 – 18 months market movements, and your portfolio.

Your time is better spent on hunting for new businesses, from existing clients and new clients.

Who knows, you may spot a new great idea and create a new investment strategy!


No. 10 Wrong and Close Shop

Or perhaps the entire strategy was fundamentally flawed and you begin to realise that:

  • Overweighting in a particular asset class
  • Relying too much on selected research or experts
  • Selecting the wrong financial instruments for the portfolio

If stock market experts are so expert, they would be buying stocks, not selling advice

~ Norman Ralph Augustine

Worst, your investors may have lost faith in you.  It may be time to close shop and start looking for look opportunities.

These are 10 ways to deal with a portfolio disaster.

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