As investors, we have a large degree of control over our investment portfolios but a comparatively insignificant degree of control over the macroeconomic events that impact them.
For instance, the S&P 500 is now down by more than 20% and “officially” in a bear market. At the same time, the Nasdaq is lower by 30% and leading growth stocks have lost even more.
At times it can feel like every investment is losing money, all while inflation runs at an 8% (or faster) clip.
Those factors are entirely out of our control. So rather than worry that these trends will lead to our financial undoing, what can you, as an investor, do to reframe the narrative? Here are four tips to improve your mindset and stay sane – and liquid – in this market environment.
- First, change your mindset. Yes, the market is down sharply from its peak, but consider “the peak” as an artificial run-up that didn’t represent real money. Remember that the S&P 500 has held its value from only a year ago. And if back in March 2020 you were told that two years later the market would be up 70%, you’d have been thrilled. Even with the recent sell-down, over the past five years the index has generated a 13.6% annualized return. That’s an impressive pace for any investment.
Ignore heated media commentary about a “bear market.” That “down 20%” definition is a media-driven term that means nothing. And the bear market started at the peak, but no one knew it at the time. Does a bear market mean you should sell, or buy? It means neither. Similarly, ignore the flood of fancy statistics that suggest that the market is about to rebound just like it has at comparable times in the past – while entertaining, these statistics have zero predictive value. You never see the stats on how often they were wrong.
Don’t try to pick “the bottom.” You didn’t pick “the top” but neither did anyone else. Picking the bottom of the market is no easier. Focus your attention and efforts on more productive activities.
Extend your time horizon. In market sell-offs, everyone’s time horizon seems to shrink to “today.” But your investments have a longer-term job: providing for your retirement, paying for the kids’ college educations and other expenses that are years or perhaps decades away. Remembering the longer-term view can tame the urgency to trade aggressively today.
- Check your equity mix relative to your target. Like most people, you probably let your stocks run up during the past two years, leaving you with too much of your money in equities. Check to see where you are now. Then, move your mix to get back in line with your target – whether that means reducing your equity mix or increasing it. Nudge your way to the target over the next few months, perhaps getting there by the July 4th No need to aggressively jam this change through.
- Weed out stocks of speculative companies that have limited prospects for a better future. Sure, their stock prices are down 70% but if their businesses have many aggressive competitors, aren’t producing profits yet require the kindness of capital market strangers to fund their payroll, then their payroll could soon include bankruptcy attorneys. These stocks might be a good place to start pruning. Similarly, hope-and-dream securities backed by, well, hopes and dreams but no real assets or cash flows probably merit offloading as well. Set yourself a deadline (perhaps that same July 4th holiday) to complete these exits.
- Look for stocks of high-quality companies with real value. While Target (TGT) has struggled this month, the company generates considerable free cash flow and is backed by a solid balance sheet. The shares offer a 2.2% dividend yield and trade at a reasonable valuation. Target (and its share price) will likely continue to struggle for several more quarters – longer if the economy heads into a meaningful recession – but the company is well managed and holds an enduring role in the economy.
Stanley Black & Decker (SWK), maker of tools and industrial equipment, is another high-quality company whose shares are priced for a recession. Demand for its products won’t evaporate in the foreseeable future, its operations generate healthy profits and cash flow, and the balance sheet is robust. Shares of Stanley Black & Decker may remain volatile but offer an appealing 2.7% dividend yield with solid long-term appeal in a complex market environment.
At the Cabot Turnaround Letter and Cabot Undervalued Stocks Advisor, we help investors navigate the equity markets using a common sense investing approach that emphasizes out-of-favor stocks of companies with real value. Let us help you sort through the market to find them.
Any other common sense investing tips you live by and would like to share? Leave a comment below!