Comparing a portfolio's average loss to the S&P's average loss provides performance information, but remember that it is only showing the comparison to the portfolio average.
Individual stocks fall more or less than the average. This is the definition of average.
But what does the average mask?
Let's look at only quality companies. Their price, like all stocks, is sometimes above their intrinsic value and below at other times. This over valuation and under valuation is often the result of herding behavior.
What this means is that if you are watching closely and understand the intrinsic value of a quality stock, the crowd's mood (herding) can make push the stock way lower than its intrinsic value and show losses much more than the portfolio average. When the price gets excessively lower than intrinsic value, the price of the stock can represent a perfect buying opportunity.
Since all stocks are either under or over valued relative to the index averages most of the time, they represent potential buying or selling opportunities. The next evaluation step is understanding if the price of the individual stock is below their intrinsic value.
All this means is when a portfolio is tracking below the index average, there are individual stocks that are down from their intrinsic values, but can add significantly to the portfolio's return. Many investors pull in their horns when their portfolio is down. The result is that they miss significant opportunities in individual stock selections.
In essence, down markets provide excellent opportunities to improve overall portfolio returns by being adept at stock selection. So when the chips are down for your portfolio, look closely at potential equity selections that are temporarily out of favor but will add big value when the crowd realizes the stock is over sold.
Keep your eyes wide open in down markets and constantly re-evaluate intrinsic values. This strategy can serve you well.
Be smart, be well-read, be aware and be successful.
